The plan for Ethereum 2.0 is a set of interconnected upgrades being built by multiple teams of developers across the world to improve the performance of the Ethereum ecosystem by making it faster and more secure. We’re talking from 30 transactions to up to 100,000 transactions per second.
Staking will replace hash power as the means of verifying transactions and securing the network. Any Ethereum holder can lock a minimum of 32 ETH to operate (or contribute to) a validator node. The more validators in the network, the stronger it becomes.
The upgrade has been in progress for years, and is scheduled to be complete in early 2022. The ‘Beacon Chain’ coordinates activity across multiple ‘shards’ and stakers, and has been live – separate from the Ethereum Mainnet – since Dec 2020.
Recently EIP-1559 and the London Hard Fork launched, making the future upgrades possible and introducing a deflationary mechanism into the protocol, which aims to help reduce gas fees and makes ETH into, ‘ultra sound money’.
The next major phase of the upgrade is ‘The Merge’ when the Beacon Chain docks with the existing Ethereum 1.0 Mainnet, and the Mainnet becomes a shard. If all goes well, the final phase of the upgrade will occur when the shards are introduced to the proof of stake network. These shards will increase the capacity of the network and improve transaction speed by extending the network to 64 blockchains. Think parallel processing for the world computer.
Once this happens, the energy expended on securing the network will drop by 99% and mining on Ethereum will become obsolete. But all the rewards that were once used to incentivize miners will still be emitted to the network, and it’s validators that will capture them.
Miners’ Losses Are Exchanges’ Gains
Ethereum 2.0 validators receive rewards proportionate to the size of the stake they have deposited in their node. The larger the pool of ETH staked, the more rewards earned by validating the blockchain.
Right now, crypto exchanges are the largest depositors staking on the Eth 2.0 Beacon Chain, contributing 23% of total deposits. In return for depositing or ‘locking up’ Ether on the Beacon Chain, depositors receive a yield of as much as 11% annually.
Ethereum 2.0 stands to be very lucrative for validators with deep liquidity, and centralized exchanges are already positioning themselves to be among the largest and for good reason. According to the Q2 20201 Report, “projected earnings across these PoS networks including Eth 2.0 are expected to be close to $12.5 billion by the end of this year.”
That’s a very large pie to be divided up across the network validators.
Of all the crypto exchanges investing in the future success of Ethereum 2.0 through staking, Kraken has the single largest allocation, and by extension the deepest liquidity. Learn more about staking on the Beacon Chain here.
Ethereum bulls with a long-term time horizon stand to gain from 5% - 17% yields for staking. An incentive sure to catch the eye of retail and institutional investors alike. In return, exchanges get an opportunity to capture significant rewards once allocated to miners if or when the upgrade to Ethereum 2.0 finally succeeds.
Originally published on the Kraken Blog in Feb 2022
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