Staking Ethereum became possible in December 2020 with the launch of Beacon Chain. Since then, Ethereum has moved onto Beacon Chain at an exponential rate. As of May 2022, 11% of all Ethereum is staked. This number is projected to grow to 70% by 2024.
What is Beacon Chain?
Before gaining understanding of Beacon Chain, let's briefly touch upon the terms PoS (Proof of Stake) and PoW (Proof of Work).
Proof of Work: Proof of Work is how blockchains like Ethereum and Bitcoin rewards miners for minting new blocks. A network of computers spend a lot of computing power to solve algorithmic puzzle. And the computer that solves the puzzle get to put together the next block in the blockchain and earn block rewards. For Ethereum, block rewards are 2 Ether per block. On an average it takes around 15 seconds for new Ethereum block to be minted. This process is extremely energy intensive.
Proof of Stake: Proof of Stake requires network computers to lock in capital in terms of Ether. These computers are called Validators. Validators check the propagation of new blocks and occasionally create new blocks themselves. They are rewarded for acting correctly and are punished for acting dishonestly or lazily by slashing their staked Ether. Once Ethereum goes PoS, also called The Merge; block rewards will reduce to 0.10 Ether per block (90% reduction)
There are number of advantages that PoS holds over PoW. But two biggest ones are
1. Less Energy Consumption:
Proof of Stake requires significantly less energy consumption as compared to Proof of Work as large processing power is not required to solve the cryptographic puzzle by the network
2. Low Barriers to Entry:
It takes significant upfront investment to build mining infrastructure. There are special chips, mining hardware and facilities that are used for PoW today. With PoS anyone holding Ether can participate in earning block rewards.
Coming back to Beacon Chain. Beacon Chain is how Ethereum is taking first steps towards becoming PoS. It is the backbone that's enabling PoS to become the possibility for Ethereum. Beacon Chain makes number of future upgrades possible for Ethereum, that will eventually increase network's throughput (number of transactions) by many orders of magnitude.
Merge is the event that ends Ethereum's Proof of Work and make it a fully Proof of Stake chain. There's no set date for Merge yet. It is projected to be complete by September 2022 pending successful clearance of many set checkpoints to verify the network's security, integrity and propagation as Proof of Stake chain.
Validators are rewarded to participate in the network at a set inflation. More validators join the network, less rewards are earned per validator. As value of Ethereum goes up, number of validators will naturally go up to capture reward yields. But post Merge, validators will also be able to earn transaction fees, similar to miners today. So if network is busy, a recent example being Otherside mint; validator total rewards might increase dramatically.
You can check our profitability calculator for guesstimating yearly rewards by visiting SonicBank Profitability Calculator.