ETH 2.0 is the evolution of the Ethereum project designed to improve the scalability, security, and programmability of Ethereum. To ensure the success of the upgrade, ETH 2.0 is being rolled out in controlled phases. The first public phase began December 2020 with the launch of the Beacon Chain. At the foundation of ETH 2.0 is the implementation of Proof of Stake (PoS) based consensus. ETH is staked to Beacon Chain (ETH 2.0) validator nodes which attest to transactions on both the ETH 1.0 and ETH 2.0 chains. Ethereum’s upgrade is an important step forward in the decentralized finance movement. A successful, which above all means a secure upgrade needs the support of the community.
Staking validators requires 32 ETH to be deposited and locked into an ETH1.0 smart contract, which in turn locks those 32 ETH to the Beacon Chain until such time as the protocol releases them. Once the deposit is processed the validator operator must work to secure and maintain the integrity of their staking validator in order to get rewards.
Staking ETH to Beacon Chain Validator nodes is central to securing the protocol. The 32 ETH is at risk of loss if Validators fail to properly attest to transactions happening in both the ETH 2.0 Beacon Chain and in the Ethereum protocol (ETH 1.0).
Providing consistent and accurate attestations to the Beacon Chain earn rewards to the validator node (also locked to the ETH 1.0. smart contract). If validator nodes do not complete the service to the Beacon Chain rewards are not earned and penalties are incurred. In the worst case of neglect, negligence, or malfeasance the node can be ‘slashed’ and the 32 ETH lost.
The Validator reward is the incentive for staking 32 ETH and providing the validator services to the ETH 2.0 network. Successful Beacon Chain validators earn ETH rewards for each successful attestation. The Validator reward yield is projected per the below graph, based on the volume of ETH staked to the Beacon Chain up until the upgrade moves to its next phase (projected 2022). The yield curve declines as more ETH is staked starting around 20% (Dec 1, 2020) and flattening around 5% APY, the current Annual Percentage Yield (APY) expectation is around 9% APY.
The APY of Beacon Chain stakes ETH is determined by the ETH 2.0 protocol community. Generally, the more ETH is staked, the lower the APY will be, there is currently (Feb ’21) more than 2.5m ETH staked. A useful source for monitoring reward yield can be found here: https://www.stakingrewards.com/earn/ethereum-2-0.
This creates 3 main challenges for community members in the ETH 2.0 upgrade.
- The need to have 32 ETH (>$50k USD),
- set up and actively maintain the validator node,
- 32 ETH is ‘locked’ for an indefinite period of not less likely than 12-months.
To learn how Lasso Finance is turning these challenges into opportunities at the next post: What is Lasso Finance?