Ethereum is readying itself to move to Ethereum 2.0. Ethereum 2.0 will shift the consensus protocol from Proof of Work (PoW) to Proof of Stake (PoS). Ethereum 2.0 offers participants that stake their ETH in ETH2 a staking yield. That being said there are some hurdles for staking in ETH2.
32ETH Minimum – The minimum to individually stake would require 32 ETH. Even with 32ETH most ETH holders will not opt to stake individually. The problem with individually staking is that the validator needs hardware in order to earn yield. The easier way to capture staking yields is to lend into a pool, similar to how current PoW miners mine as part of pool.
No Withdrawals – Currently, if an ETH holder decides to stake ETH in ETH2 they are unable to withdraw of transfer their ETH. This is a major hurdle for ETH holders; liquidity is existential to any investment. Withdrawals for ETH2 will not be available until the beacon chain is fully merged with ETH1. This is expected to take at least 12 months. Even once the chain is fully merged, there is a planned 27 hour unstaking buffer period. The lockup is the biggest driving factor for ETH whales not to stake in ETH2 directly.
Hardware Requirements – The move to PoS does not exempt validators from running hardware. Popular ETH2 plug-and-run options are not chap. Not only do you need 32ETH but you need to spend at least $500 + electricity costs. Dapp node seems to be the most popular solution for individual stakers looking for hardware.
Miner Extractable Value to Validator Extractable Value (MEV to VEV) – ETH became victim to MEV extraction. There were different GETH implementations like Flashbots and KeeperDao to help democratize the mining landscape. MEV will continually happen on ETH2 in the form of validator extractable value (VEV). Due to the chain not being merged yet, ETH2 stakers are paid out via only inflation rewards. Once ETH2 is fully merged, the validators will earn inflation + transaction fees + MEV. If there is anything that we have learned from MEV, that the larger miners have more resources to find and extract MEV. As stated, Flashbots which has been the popular MEV-GETH patch, is currently not compatible with ETH2. MEV extraction by pools will dictate the APY returned to their stakers, this will drive centralization to validator pools.
ETH 2.0 Validator Queue – Not only do validators need 32 ETH and hardware to stake, there is currently a queue in order to activate a ETH2 validator. The activation queue is currently about 8 days and hit a high of 3 weeks at one point. The queue is expected to grow as we get closer to the merge. The wait to get the validator activated is an opportunity cost for pools returning yield to their stakers.
Although these inherent problems ward off people from staking directly into the Ethereum protocol, I do believe these problems are being addressed through different liquid staking derivative offerings. More color to come.
Dhruv's Bubble 