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  • What is Staking?

  • Can it help me earn passive income with my cryptocurrency?

  • It is risky?

  • And what do I need to know before I get started?

  • Well stick around:

  • here on Crypto Whiteboard Tuesday, we'll answer these questions and more.

  • Hi, I'm Nate Martin from 99Bitcoins.com

  • and welcome to Crypto Whiteboard Tuesday

  • where we take complex cryptocurrency topics, break them down

  • and translate them into plain English.

  • Before we begin,

  • don't forget to subscribe to the channel and click the bell

  • so you'll immediately get notified when a new video comes out.

  • Today's topic is staking and how it's done on Ethereum.

  • But before we dive into staking

  • let's take a moment to understand the problem that staking tries to solve.

  • Also, if you're new to cryptocurrencies

  • let me suggest that you start with our

  • what is Bitcoinandwhat is Bitcoin miningvideos

  • before watching this one

  • to gain a solid foundation for what we'll be covering here.

  • Bitcoin and other decentralized cryptocurrencies

  • hold the promise of sending money digitally without any central authority.

  • Initially, the solution to managing a blockchain,

  • which is a fancy term for a ledger of balances that isn't controlled by any one entity,

  • was done through mining.

  • Mining is sort of a competition

  • where powerful computers try to guess the solution to a mathematical question.

  • Whoever finds the solution first,

  • earns the right to write the next page of transactions,

  • also known as a block, into the ledger.

  • With mining, the more powerful computer you use,

  • the more guesses it can make in a second,

  • increasing your chances of winning this contest.

  • Thanks to the laws of math and probability,

  • it is highly unlikely that any single person or group

  • will gain a monopoly over updating the ledger,

  • and that's how decentralization is maintained.

  • Mining's technical term isproof of work” -

  • because by displaying the right solution,

  • miners prove that they've put in a lot of work,

  • as there is no other way to get to the solution

  • aside from using computing power

  • to constantly work at trying to guess it.

  • Proof of work is what is known as a consensus mechanism

  • since its design is to create an agreement

  • as to who gets to update the ledger amongst a group of people

  • who don't really know each other

  • or have any other basis for working together.

  • While the proof of work consensus mechanism

  • may be a reliable and secure solution for managing a decentralized ledger,

  • it's also very resource intensive.

  • Running all of these supercomputers just for the sake of guessing a number

  • takes up a lot of electricity, among other disadvantages.

  • Because of these disadvantages,

  • other alternative consensus mechanisms have been suggested throughout the years.

  • One very popular alternative is proof of stake.

  • This means that instead of committing electricity to run computers

  • and try to win a contest, people will stake actual coins.

  • But how does this all work?

  • Well, you basically lock a certain amount of funds

  • on an everyday computer that is connected to the network.

  • Your computer is called a node in technical terms

  • and your locked funds are your stake.

  • Once your stake is in place

  • you take part in the contest of which node will get to forge the next block.

  • You see stakers forge blocks, they don't mine them.

  • The winner of this contest is chosen by taking into consideration several factors

  • such as how much money is being staked, how long the coins have been staked for

  • and randomization

  • so that no single entity will gain a monopoly over forging.

  • Generally speaking,

  • whoever wins the contest gets to forge the next block of transactions

  • and is rewarded in coins for his contribution to the network.

  • It is important to note

  • that there are many coins that use proof of stake

  • such as Tezos, Cosmos and Cardano,

  • and each coin has different rules as to how it calculates and distributes rewards.

  • In this video we will focus mainly on how Ethereum's proof of stake model works.

  • Up until 2020,

  • Ethereum's blockchain was based purely on proof of work;

  • but in December of 2020 a new blockchain namedBeacon chainwas set up

  • that uses proof of stake:

  • this is also known as Ethereum 2.0

  • and it runs alongside the original Ethereum blockchain, Ethereum 1.0.

  • In order to join as a validator for Ethereum 2.0

  • you will need to lock up 32 Ether as collateral,

  • which in turn will earn you staking rewards.

  • There's no way to lock up more than 32 Ether on a single node,

  • so if you want to increase your reward

  • you can just set up multiple nodes with 32 Ether each.

  • In a few years,

  • Ethereum 2.0 will deploy in full and will merge with Ethereum 1.0.

  • This event, known asthe docking”, will happen somewhere around 2022,

  • after which Ethereum will become purely a proof of stake network.

  • Only after the docking occurs

  • will you be able to withdraw your staked Ether and rewards,

  • which means that staking is mainly beneficial for long term Ethereum holders.

  • Now you're probably asking how much Ether is rewarded?

  • In Ethereum 2.0 each validator that participates

  • in the forging of a block

  • gets a percentage of the newly minted Ether when it's created.

  • The more validators the network has,

  • the smaller the proportion of the reward will be.

  • For example if 1 million ETH is staked,

  • the max annual reward for each staker could reach 18.10%,

  • however if 3 million Ether are staked,

  • that annual reward rate would drop to 10.45%.

  • You can think of the total amount of new Ether awarded

  • as a pie with a fixed size,

  • and the more validators you have that want a piece of that pie -

  • well, the smaller each slice will be.

  • To simplify things

  • there are dedicated staking calculators you can use

  • that will try and estimate how much Ether you'll make

  • when staking a certain amount of ETH in any certain way.

  • So where do I sign up?

  • Well, signing up is not that easy,

  • as there are certain limitations you should be aware of.

  • Each day, only 900 new validators are allowed on board,

  • so as you can imagine there's a pretty long waiting list.

  • At the time of posting this video

  • there are almost 20,000 pending validators waiting to join.

  • Additionally,

  • setting up your own validator requires technical knowledge,

  • a dedicated computer and 32 Ether -

  • all of which provide barriers

  • that may keep a lot of people from being able to take part.

  • To make matters even more complicated,

  • if you don't set up your validator correctly,

  • or if it goes offline or it is harmful to the network in any way,

  • you may be subject to penalties.

  • These penalties may even include 'slashing' -

  • a term referring to the destruction of portions of your stake

  • and even removal from the network.

  • All of the risks I've just mentioned

  • are why some additional staking solutions were created.

  • These alternatives allow for the everyday person to stake ETH

  • and earn staking rewards -

  • without the considerable effort or risk of running your own node.

  • The easiest way to stake for a non tech savvy person

  • would be to use staking services supplied by exchanges.

  • Certain exchanges allow you to stake your coins

  • through their validators

  • even if you only have a small amount for a fee.

  • This completely eliminates the hassle of running your own validator

  • but requires you to forfeit control over your coins to the exchange.

  • Some exchanges will also allow you to claim your staking rewards immediately

  • and not wait until Ethereum 2.0 reaches the docking phase.

  • Another option is to join a staking pool.

  • Just like mining pools,

  • staking pools are groups of people joined together

  • in order to get a better chance at forging the next block.

  • Staking pools also allow you to deposit less than the minimum staking amount

  • since all of the funds are pooled together.

  • If you decide to go with a staking pool

  • it's important to research certain aspects of the pool;

  • such as reliability of its validators, pool fees, customer support,

  • the size of the pool, user reviews

  • and whether or not you are required to give up your private keys to the pool.

  • Finally, there is the validator as a service option.

  • These are companies that will allow you to run your own validator on their computers

  • without the need to set it up or maintain it.

  • Since this is your own personal validator,

  • you'll still be required to deposit 32 ETH and pay a certain fee for this service.

  • The great thing about this option is that it's relatively easy to set up

  • and you don't need to give control over your coins to another company.

  • That's it for today's episode of Crypto Whiteboard Tuesday.

  • Hopefully by now you understand what staking is -

  • a way of participating in the process of updating a ledger of transactions

  • by putting your funds at stake and earning rewards for your contribution.

  • You may still have some questions.

  • If so, just leave them in the comment section.

  • And if you want to learn about the different staking options

  • just take a look at the links we've listed below.

  • Also, if you want to discover more opportunities

  • for generating interest on your cryptocurrency

  • take a look at ourWhat is Defi?” video.

  • Finally, if you're watching this video on YouTube, and enjoy what you've seen,

  • don't forget to hit the like button, subscribe to the channel

  • and click that bell

  • so that you'll be notified as soon as we post new episodes.

  • It really helps us out a lot.

  • Thanks for joining me here at the Whiteboard.

  • For 99bitcoins.com,

  • I'm Nate Martin, and I'll see youin a bit.

What is Staking?

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