Can you make money from Ethereum 2.0?
Is ‘staking’ the innovation that the cryptocurrency has been waiting for?
If you track cryptocurrencies, chances are that you have an opinion or two about Ethereum. Bitcoin might be the world’s most successful cryptocurrency by market cap, but Ethereum is still a clear second.
Critics have argued that Ethereum has never really achieved its potential but soon they may be forced to revise their views. For even though Ethereum has suffered a fairly turbulent 2019, there are changes afoot which make it a currency to keep an eye on.
In particular, the introduction of a new iteration of the technology, Ethereum 2.0, should interest investors for a number of reasons and not just for trading. Whisper it, but there may be passive income streams that Ethereum 2.0 offers which might prove to be lucrative if Ethereum can address some of the technological issues that are holding it back.
According to its developers Ethereum was born out of a concern that too many of the world’s applications were being stored centrally by a small number of companies such as Amazon, Microsoft and Google.
Ethereum’s creators, the most high profile of which is arguably the Russian/Candian entrepreneur Vitalik Buterin, set out to enable users across the globe to write decentralised applications using the Ethereum blockchain. If data was stored in thousands of different places, its owners believed it would be more secure and could not be tampered with.
Central to this innovation was the concept of smart contracts. These are a computer protocol intended to digitally facilitate, verify or enforce the negotiation or performance of a contract without the influence of third parties. This means that transactions are, in theory, irreversible and transparent. This sounded like an amazing project which inspired many of the early crypto enthusiasts.
Yet there have been technical issues with the way in which Ethereum has developed that have limited its ability to scale. Applications that run on its DApp store — think the equivalent of the Apple Store or Google Play — haven’t exactly had widespread appeal and the top Ethereum DApp attracts only a few thousand users per day. Even if a DApp were to attract mainstream adoption, it’s unclear if Ethereum could support it.
Ultimately, for numerous technical reasons, deploying code on Ethereum is more expensive than using a centralised service such as AWS and it runs much slower.
What’s the difference between mining to staking?
Ethereum hopes to address this with one of the biggest changes to Ethereum 2.0 — the shift from mining to staking. Up until now Ethereum has run on a “proof of work” blockchain system. Similar to, though not identical to, the way that Bitcoin works, miners compete to solve a hugely difficult cryptographic problem. In order to mine, individuals need to equip themselves with substantial hardware and be prepared to pay astronomical electricity costs.
By contrast “proof of stake” reaches a consensus through a set of nodes known as validators. To participate in staking, investors need to run a validator node to stake through and have at least 32 ETH tokens (current price around $7,000) in a deposit. This enables the staker to create a block. Validators from across the Ethereum network are selected to vote on new blocks semi-randomly with other validators agreeing on the result thereby achieving a consensus.
Similar to mining, staking will create a rewards system, though quite how much income stakers will be able to generate has not yet been decided.
Vitalik Buterin has suggested that it could be anything between 1.5 and 18 per cent depending on how much Ethereum is staked. Yet the consensus among seasoned Ethereum watchers seems to be that the real world figure is likely to be in the region of 5 per cent.
Can Ethereum staking offer easy passive income?
The issue for many investors is that, while this sounds an intriguing way of generating a passive income, there are still technical drawbacks to overcome. Stakers won't require a high-powered computer — it has been suggested that even a Raspberry Pi would suffice— but, in order to support one of the validator blocks, the computer will need to be online all the time. It still sounds like a lot of work and expense.
What may make staking Ethereum a lot more attractive to investors is if they undertake the process via a third party. Several companies are planning to offer staking in a number of different ways.
First, users can join a pool, which means that can take part with just one ETH (around $180) as opposed to the $7k they would need to own 32 ETH.
Alternatively, some companies will offer staking as a service — users simply invest their money and the company takes care of the rest for a fee. It is possible that investor platforms might offer ETH staking as a service too.
No one knows quite when Ethereum 2.0 will go live and when the staking will begin. Yet most of the rumours point to a launch by the end of March 2020 at the latest, probably before.
What does staking mean for Ethereum’s price?
So where does this leave someone who is contemplating investing in Ethereum? To begin with, the rollout of Ethereum 2.0 is expected to be a lengthy process. In addition to staking, Ethereum will introduce a concept called sharding — a method of partitioning a large database into smaller pieces known as shards. Each shard will have its own chain of transactions and the theory is that will significantly speed up transactions and enable Ethereum to scale.
It is clear that Ethereum, as it is now, has operational/scalable issues and that in theory Ethereum 2.0 will address these. How this will impact on its share price remains to be seen. ETH had a pretty awful August trading at $166 per coin, a 28 per cent drop from the high it saw at the start of the month and way below the $307 quarterly high of July. At the time of writing ETH has rallied slightly and is now worth $176.24.
Much depends on whether Ethereum can convince investors that its new iteration not only succeeds in solving its scalability and technical issues, but also that it can do so without compromising the existing Ethereum platform.
The next few months are going to be fascinating in so many ways for Ethereum.
Tokenised securities are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how tokenised securities and leverage work and whether you can afford to take the high risk of losing your money. Nothing in the above article should be regarded as a recommendation to trade generally, to trade on a particular platform or to trade in a particular asset. Asset prices can go down as well as up and past performance is not a guide to future performance. Investors and traders should thoroughly research an asset or strategy before making any trading or investment decision and if necessary seek professional advice.