Previously referred to as “Ethereum 2.0” or “ETH 2.0”, Ethereum’s “consensus layer” has recently reached the milestone of over 10 Million Ethereum staked. Deposits into the Ethereum networks contract address have now reached over $25 billion dollars displaying a high level of confidence in the cryptocurrencies future.
Ethereum 2.0 or consensus layer is Ethereum’s roadmap from a proof of work model blockchain over to a proof of stake model blockchain. Earlier this year, a rebrand of the roadmap was announced by the “Ethereum Foundation” suggesting the conversion be renamed from “ETH 1.0 and ETH 2.0” over to “Execution Layer” and “Consensus Layer” respectively.
What is Ethereum 2.0 or Consensus Layer
Ethereum 2.0 is a long awaited Ethereum upgrade that will overhaul Ethereum’s consensus mechanism from a proof of work platform to a proof of stake platform. Proof of work blockchains use computing power to solve difficult mathematical equations (or mining) to support and validate transactions on a blockchain. Proof of stake works differently, the mining is accomplished by holders of the digital asset staking their digital coins for the right to validate transactions.
In the past few years proof of work blockchains have come under scrutiny due to the amount of computing power and therefore energy required to compete as the mathematical complexities get more and more difficult as the blockchain develops and gains popularity. The use of enormous amounts of energy to power these computers can have a negative environmental impact and is difficult to scale. Proof of stake has grown in popularity as an alternative and greener form of supporting digital assets, while solving many scalability and security concerns. Proof of work generally can increase the network scalability by reducing transaction times, thereby increasing transactions per second (TPS).
What is Cryptocurrency Staking?
Crypto staking is a way investors or crypto holders can earn rewards by locking up their tokens on the blockchain thereby contributing to the overall security of the blockchain. Specific cryptocurrencies that use proof of stake model to validate transactions allow their investors to participate and become crypto miners simply by committing their coins or tokens into the staking process, usually for an agreed upon length of time.
Most cryptocurrency exchanges now offer their clients this ability, in addition you can stake your tokens directly through the specific blockchain as well. Many crypto stakers can make between between 5% and 30% in passive income depending upon the blockchain chosen.
Ethereum is the world’s second largest cryptocurrency by market cap behind only Bitcoin (BTC). It originally was created as a proof of work blockchain following Bitcoin’s lead. It is now in the process through several layered upgrades of moving to a proof of stake model, it will currently run both models in tandem before fully switching over to ensure a seamless cutover. One of the major differences with staking ETH from other proof of work digital assets is that you are committing to keep the coins staked or locked on the network (without access to them) until the upgrade is fully completed, which could run into 2023 or later. Other coins will typically ask for staking time commitments of 1 – 6 month intervals.
The benefit to staking is that you can earn passive income on the coins you staked. If you were planning on holding the coins anyway, it does not hurt to earn additional profits on them. The downside to staking is that you have committed to leaving the coins staked for a period of time, if the crypto market prices were crashing and you wanted to sell those tokens, you would not be able to do so while they are staked.