Ethereum 2.0: The choice between an own node and a staking service

As the Ethereum 2.0 update approaches, users have been showing an increasing interest in the staking process, which would allow them to obtain a passive income by validating the new network.

This is evidenced by the growing number of Ether (ETH) portfolios and ETH deposits in cryptomoney exchanges. According to a recent report published by the analytical company Arcane Research, the number of Ethereum wallets containing 32 ETHs or more – the minimum amount of coins needed to operate the staking node – has increased by 13% over the year, and the number of search queries on Google „Ethereum 2.0“ has grown about six times since March.

While some users have already chosen to run their own validator node, others are still choosing between becoming independent validators, joining a staking group or using the services of a stakeholder provider. But is there really a difference?

How will staking at Ethereum work?

The upgrade of the Ethereum network will move from the Test of Work (PoW) algorithm to the Test of Shares (PoS) consensus algorithm, replacing miners with validators who will stake their coins to verify transactions. Once the validators verify the honest transactions, they will receive the rewards in the form of passive income – this process is called staking.

At this time, the exact size of an annual reward for Ethereum stakers is still unknown. However, according to the project roadmap, this value will vary between 1.56% and 18.1% and will be inversely proportional to the total number of validators: When the network increases, the rewards will contract.

On the one hand, a staking model can be attractive to a wide range of cryptomint users because it does not require expensive mining equipment or special technical expertise and can seem as simple as having a bank deposit. All that is needed to receive the annual interest on the stake funds is to store the ETHs in a hardware wallet.

However, an in-depth analysis of the requirements to become an Ethereum network validator has shown that not everything is as simple as it might seem at first glance. The minimum entry threshold of 32 ETHs is only one of those requirements.

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For example, given the ETH exchange rate of $250, the user will have to invest $8,000 to become an Ethereum 2.0 Blockchain validator. But what about the reward? Considering the validation cost of $180 and an average reward of 5% suggested by Ethereum developer Justin Drake, the annual profit of the 32 ETH bet can be around $190. Thus, given the potential risks of Ether’s price experiencing volatility and users not being able to withdraw funds, it is unlikely that this reward model will allow the average user to take home a large prize.

Another task that users will have to deal with in order to be a complete validator is to run their own validator node. As evidenced in a survey published by Consensys, 33% of Bitcoin Future users are ready to perform this task. But that’s not all. In addition, validators would be needed to ensure the uninterrupted operation of the hardware wallet. If users go offline, they lose all their daily income. Even worse, if at any time their Stake falls below 32 ETH, users will lose the right to be validators.

The entry threshold for Ethereum staking is not as high as the cost of operating a master node in other Blockchain networks, such as Dash, and for many users, high entry barriers may be unaffordable. That same survey conducted by Consensys also showed that 33% of ETH owners do not intend to participate in the staking network, and 71% of those who refused said they do not have enough ETH to become validators.