To investors looking for crypto-assets exposure with potential rewards, blockchains adopting the Proof-of-Stake (PoS) consensus mechanism are great options to participate in. The PoS concept enables anyone to mine crypto-assets by validating block transactions just by holding existing coins. It’s a type of consensus mechanism which rewards users for collateralizing native cryptocurrency in order to validate transactions on the network.
PoS was created as an alternative to Proof of Work (PoW), which is the original consensus algorithm on the Bitcoin network. PoW requires huge amounts of energy, while PoS gives mining power based on the percentage of coins held. The former PoW miners are becoming PoS nodes operators. Compared with PoW algorithms, PoS is more energy-saving.
PoS also offers a governance structure around staking. Token holders are able to vote in decisions such as network upgrades, emissions adjustments, and other changes that previously were the decree of a closed development team.
Rigorous economic and game-theoretic thinking about the interplay of the incentives of token holders, validators, and other key players represents a key part of this network design. Several PoS initiatives seek to remedy some critical flaws from earlier iterations, including projects such as Tezos, Cardano, Cosmos, Algorand, Zilliqa, or Hedera Hashgraph.
Ethereum 2.0 just around the corner?
Ethereum, the world's largest smart contract platform, is preparing its transition from PoW to PoS to create a revamped Ethereum 2.0 network. The move away from PoW to PoS is designed to improve upon Ethereum's scalability issues.
Phase 0 has been formalized for launch in early December. A deposit contract was released in early November, as the first physical implementation of ETH 2.0. The deposit contract acts as a bridge between the forthcoming proof-of-stake (PoS) blockchain and the current proof-of-work (PoW) mainchain. The contract must collect 16,384 deposits of 32 ETH each, a total of 524,288 ETH, to proceed with the launch. The required sum must be collected at least seven days before the expected launch date of Dec. 1. If it is not, the launch will be delayed to seven days after the threshold is reached.
On November 25th,+715,872 ETH had been staked, representing +135% of the overall amount needed to start the Phase 0.
Stakers will begin earning inflation rewards after the genesis event by placing their ETH as collateral on ETH 2.0. Staking rewards are reasonably high compared to other traditional investments, coming in between 8%–15% annually. But the deposit contract launch has still sparked a debate over staking within the crypto community, as there appears to be some hesitancy among regular crypto-assets investors so far.
Higher yielding opportunities in DeFi could hinder staking participation, as ETH staked needs to be locked up for a long period, leading some to question whether the returns justify the means. Transfers between validators are disabled until at least phase 1. Validators will have to wait until phase 2 (estimated around two years) to be able to withdraw their funds.
To increase the staking rate, several companies are developing ways to make staking more attractive. A non-custodial staking platform called Blox is developing a solution that will allow users to pool their ETH to get past the threshold required for staking when the upgraded network goes live. By creating a network of decentralized staking pools, Blox would allow users to aggregate their ETH and reach the required 32 ETH to stake on the network. Allowing ETH stakers to join the network and generate rewards with any amount of ETH is pivotal for making ETH 2.0 accessible for everyone.
Another example is Darma Capital which, through its LiquidStake initiative, lets both retail and institutional stakers delegate their capital and maintain the ability to use it as collateral to receive USD Coin (USDC) loans. This intermediate staking would allow users to have access to their capital before phase 2 kicks in.
The launch of Phase 0 will not directly affect the existing Ethereum blockchain, which will continue operating as before with PoW mining. Phase 1 and Phase 2 transitions, expected to occur in the next few years, will at some point move the existing Ethereum infrastructure and state to the new staking-based consensus.
While Ethereum continues to develop the next stage of its evolution, a group of developers will focus on the existing chain to maintain its operability during the transition. Phase 0 is a bridge, and although the transition is gradual between ETH1 and ETH2, there is a possibility that a contentious hard fork like the one that resulted in the creation of Ethereum Classic could occur. Actually, the Ethereum network has recently suffered kind of a hard fork on November 11 due to irregularities on infrastructure providers Infura and Blockchair, presumably linked with Ethereum node software Geth’s last update.
The first phase of the Ethereum 2.0 upgrade was originally set for January 2020. It’s since been delayed with a launch now expected in December. But the full version of ETH 2.0 will not be up and running before 2022. Indeed, decentralized software updates take time, as they deal with user funds and an immutable blockchain network.
The use of staking will become more widespread on the protocol level with Ethereum 2.0’s expected arrival, along with the continued development of other networks like Cardano, Tezos, or Algorand, ultimately changing the landscape of the blockchain industry. As Ethereum 2.0 won’t be fully operational for another two years, the competition with other networks will keep running for quite some time.
Binance briefly pauses Ethereum withdrawals as network suffers ‘minor hard-fork’ - Cointelegraph ; Nov 11, 2020 
LiquidStake set to unlock liquidity for Ethereum 2.0 Phase 0 stakers - Cointelegraph ; Nov 11, 202 
Ethereum 2.0 deposits at 10% of launch threshold as deadline approaches - Cointelegraph ; Nov 10, 2020 
$5M staked in eight hours as community cautiously backs ETH 2.0 - Cointelegraph ; Nov 05, 2020 
Ethereum 2.0 begins launch process as deposit contract goes live - Cointelegraph ; Nov 04, 2020 
Ethereum 2.0 Countdown Begins With Release of Deposit Contract - Coindesk ; Nov 04, 2020 
One billion ZIL staked in first few hours as Zilliqa embraces DeFi - Cointelegraph ; Oct 15, 2020 
If This New Tech Works, You Won’t Need 32 Ether to Earn Staking Rewards - Coindesk ; Oct 14, 2020 
Comparing Staking Rewards - Is Liquid Staking Better Than Proof of Stake (PoS)? - Hackernoon ; Sept 19, 2020 
2020 Is Becoming the Year of Staking With Some Major Achievements - Cointelegraph ; Aug 03, 2020 
MEW Founder: ‘The Full Reality of ETH 2.0 Is Still Years Away’ - Cointelegraph ; Jul 31, 2020 
Ethereum 1.x Devs Focusing on ‘Stateless Clients’ to Curb Chain Bloat - Cointelegraph ; Jan 18, 2020 
Proof of Stake (PoS) - Investopedia ; Aug 11, 2019