Here’s how some people are making money from the transition to Ethereum 2.0. Do you have a plan?
Ethereum 2.0, also known as Serenity, refers to the upcoming ‘complete’ version of Ethereum, which will be characterised by faster transactions, lower fees and a host of other upgrades.
The updates are an ongoing process. Plans for it have been drafted and revised over the years, and now it’s underway and expected to be completed by 2022.
“The Ethereum network is a force to be reckoned with. If the 2.0 upgrade can deliver on expectations around scaling it could potentially end the blockchain building race,” said Swyftx co-founder and CEO Alex Harper. “There are some worthy competitors but ETH no doubt has prime position.”
The move to Serenity also includes a series of changes to the Ethereum cryptocurrency and how the network will operate, which affects users in different ways.
As such, different users are responding to these changes in different ways. While no one needs to do anything – the updates will happen and your ETH will remain safe – some people are changing tack with the intention of trying to directly benefit from the updates.
Holders are those who are passively holding onto Ethereum, either in their own wallet or on an exchange, presumably with the expectation of it being priced higher in the future than it is now.
As a result of the migration process, many of these holders can now start looking forward to certain exchanges offering opportunities to earn interest on ETH.
This is because a key part of the Ethereum 2.0 shift is a transition from proof of work (PoW – miners mine blocks and get rewarded) to proof of stake (PoS – users stake ETH to validate blocks and get rewarded).
In implementation this essentially involves running a new PoS network inside the PoW Ethereum blockchain, to test it thoroughly in mostly real-world conditions. This PoS network is called the Beacon Chain. If it performs well, the old PoW blockchain can then be let go while the Beacon Chain takes over and becomes the new Ethereum PoS consensus mechanism.
To test it, people have to stake real Ether in the Beacon Chain. While inside it cannot be directly used on the main Ethereum chain. It’s essentially locked away until the Beacon Chain takes over.
The upside is that it earns interest in the form of staking rewards while locked in the Beacon Chain. At the time of writing those returns are 9.2% annualised.
Exchanges often have their own Ether holdings, and can either participate in Beacon Chain staking with their own cryptocurrency, or will let users make deposits through them to earn a share of the returns without them needing to participate personally.
Of course, even without doing anything, the move to Ethereum 2.0 is likely to be an overwhelmingly bullish catalyst. Not only does it turn ETH itself into a yield-bearing asset, but as more people stake to earn that interest, the amount of ETH in circulation dwindles.
For holders, dollar cost averagers and other speculators hoping to capture upside from ETH price movements, playing the game more effectively can be as simple as making sure each purchase is as cost-effective as possible, with small spreads and low fees.
In that vein, it may be worth comparing ETH purchase prices on exchanges, including Swyftx, to see where you can get the best value for money. Across multiple buys and sells, fee differences can add up fast.
Ethereum users who hold funds in their own wallet and use dApps can directly stake Ether on the Beacon Chain to earn that interest, but it comes with a few risks and conditions which mean it’s definitely not for everyone.
Firstly, the minimum amount an individual staker can contribute is 32 ETH, which prices out a lot of people and represents a substantial investment.
Secondly, it’s not risk-free. While the risk of some unknown bug causing massive loss of funds is negligible (as far as everyone knows), “slashing” is still an issue.
Slashing is how misbehaving or hostile stakers are penalised. It means the network confiscates a portion of their staked ETH. These penalties are necessary to ensure the security of the system and to keep Ethereum proof of stake working as intended.
But while slashing is generally intended to prevent nefarious activity, it can also penalise unintentional digressions, such as extended internet outages, misconfigured software and other accidents. As such, staking one’s own ETH directly onto the Beacon Chain is generally more for advanced users.
Fortunately, there are alternatives. Projects such as Lido, for example, let people pool and collectively stake Ether on the Beacon Chain, while receiving interest-bearing representations of that staked Ether (known as stETH) back on the main Ethereum blockchain.
This allows for the best of all worlds. There’s no 32 ETH minimum, users can earn interest on ETH and they can use their Beacon Chain ETH on the existing Ethereum blockchain.
It also introduces new downsides though. There is a low but non-zero chance of smart contract bugs resulting in loss of funds, the high Ethereum gas fees still rule out smaller participants and a certain level of knowledge is needed to safely navigate the space and manage ETH, stETH and all the other DeFi paraphernalia involved in the process.
Advanced users can directly stake ETH on the Beacon Chain themselves, and run their own node.
A relatively high level of technical knowledge is needed to do this, and an even higher level is needed to do it safely and avoid slashing penalties.
From a strictly investment perspective, 9% per annum returns on ETH is not to be scoffed at but it’s still less than people are getting from ETH utilised in other ways. Similarly, many people are preferring to use staking projects such as Lido to earn returns while also getting a relatively liquid representation of their staked ETH.
As such, it’s safe to say a large portion of all the ETH staked on the Beacon Chain was put there by people without straightforward short-term financial motives. For some it’s a desire to contribute to the long-term success of Ethereum to protect their investment, for others a desire to be part of history, to experiment, to be a productive member of the Ethereum community, to look cool or various combinations of all of the above.
Of course, even as all this goes on the ETH markets keep ticking and traders keep trading. While many traders, depending on their style, are happily ignoring Ethereum 2.0 and focusing on the charts in front of them, others are factoring in the potential price impacts of these developments and the timeline around them.
While there are never any guarantees of any sort, it’s clear that the movement towards Ethereum 2.0 is exciting in its own right, and is opening up plenty of opportunities.
This information should not be interpreted as an endorsement of cryptocurrency or any specific provider,
service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and
involve significant risks – they are highly volatile and sensitive to secondary activity. Performance
is unpredictable and past performance is no guarantee of future performance. Consider your own
circumstances, and obtain your own advice, before relying on this information. You should also verify
the nature of any product or service (including its legal status and relevant regulatory requirements)
and consult the relevant Regulators’ websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.
Disclosure: The author owns a range cryptocurrencies at the time of writing
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