…is the mechanism, by which anyone with the minimum-required balance of 32 ETH can act as a validator for the Ethereum network by verifying transactions & creating new blocks. To do this, you are required a “loaded” pair of validator keys with which you sign the actions of your node on the network.
Last Updated: August 2022
The first question we always hear is how the hell does that actually work?
In short: Your server acts as a validator, someone who is allowed to add block to chain for the network and get rewarded or punished (if you do something potentially malicious) for playing an important role in the network – Ethereum and its Proof of Stake (PoS) system make it possible.
What you absolutely need to be able to use Ethereum to its full potential? 32 ETH. Even with less you can stack, but then you have to rely on other entities – which means in the worst case (like with Staking options of exchanges) you don’t own your keys and if something happens to them, your ETH is at risk.
“Blockchains” refer to “Decentralized Ledger Technology” (“DLT”), which are protocols that govern a distributed ledger, whose records are arranged in sequential “blocks” – in a chain of collected transactions. DLTs innovation lies in the fact the they solve the “Byzantine General Problem” – a riddle like presented consensus problem where a certain number of actors are assumed to act maliciously. These “blocks” governed by the Ledger in public blockchains like “Ethereum” and “Bitcoin” are publicly visible and created by a differing automated consensus mechanism – which gives you the ability to look into every detail of every transmitted transaction by the network participants & verify every block created on the network with a block explorer yourself.
The underlying details in protocol of every blockchain differ widely. Either by where they inherit security from, how private they are, or by how much permission a participant needs to transact on the ledger. Every single (decentralized) ledger technology, even legacy like banks, tackle the problem that they are naturally a subject off, referred to as the Scalability Trilemma or commonly referred to as the Blockchain Trilemma, differently.
Every area covered between the three pillars on the following graph describes a unique system with advantage & disadvantages.
Blockchains are often forced to make trade-offs that prevent them from achieving all 3 aspects:
With every financial network, the most important part is the consensus mechanism through which the entities can reach a necessary agreement to its state to secure the network funds. DLT use different methods to reach a consensus – the most common one used being Proof of Work & Proof of Stake
In Proof of Work a network participant (node) has to complete a specified task in order to submit new transaction to the blockchain. In the case of Bitcoin whenever a transactions occurs, they go through a security verification and are grouped into a block to be mined. Bitcoin’s proof-of-work algorithm then generates a hash for the block using a algorithm, which always generates hashes with 64 characters.
Miners race to be the first to generate a target hash that’s below the block hash. The winner gets to add the latest block of transactions to Bitcoin’s blockchain and receive rewards in the form of newly minted BTC coins and transaction fees spent on the network. Bitcoin has a fixed maximum supply of 21 million coins, but, after that, miners will continue receiving transaction fees for their service.
The proof-of-work algorithm used by Bitcoin aims to add a new block every 10 minutes. To hit that time, depending on how quickly miners are adding blocks, the difficulty of the generation changes. Does the mining happen too quickly, the hash computations get harder and easier if they are coming in too slow.
This variable difficulty changes the computation speed necessary for the consensus mechanism to work. The higher need for computation also raises the energy consumed by nodes used to mine, which in the case of Bitcoin lead over the years through raising mining competition to the case that it uses annually more energy to secure its network than the midsized countries of Argentina and the Ukraine.
Proof-of-stake reduces the computational work needed to verify blocks by changing the way blocks are validated using the machines of “staked” coin owners to ensure the integrity of the blockchain. To do this coin holders offer a specific amount of coins as collateral (“stake”) to become “validators”. In proof-of-stake validators are responsible for the same thing as miners in proof-of-work: ordering transactions and creating new blocks so that all nodes can agree on the state of the network…but other than with proof-of-work, the entity who gets to in the end add a block to the blockchain is selected randomly rather than using a competition based rat race of computational power. Validators also don’t mine blocks; they create / forge blocks when chosen and validate proposed blocks when they’re not. This validation is known as attesting, which is what is recorded in the beacon chain rather than the transaction itself.
At least 128 validators are required to attest to each block – this is known as a “(sync) committee.”, which are given a time-frame in which to propose and validate a block. This is known as a “slot.” Only one valid block is created per slot, and there are 32 slots in an “epoch.” After each epoch, the committee is disbanded and reformed with different, random participants. This helps keep shards safe from committees of bad actors.
Validators get rewards for proposing new blocks and for attesting to ones they’ve seen in a honest fashion, and gain additionally rewards if they are chosen to be part of the “committee” and extra, if they are the ones creating a block. In return they get penalized if they should propose or attest a malicious block, or use the same key multiple times to attest.
This might seem like a counterproductive measure for us to partake in this guide, but we personally believe that our goal isn’t to sell you on anything (which is hard anyway, because our SOFTWARE is completely free) – we want to convince of the possibility, we are offering to you and we believe to do that, you should also know of the disadvantages of Ethereum staking:
Currently, because the system is still in its building up phase and the validators are needed to contribute to the development of the change to “Proof of Stake” – it is NOT POSSIBLE to WITHDRAW the stacked ETH or the rewards from staking. Which means if you would like to take some profits from your ETH investment the staked amount will be locked in the Beacon Chain, preventing you from quickly reacting to price changes. ONLY STAKE if you treat your ETH as a LONG TERM ASSET and have the CONVICTION to let your investment work on the BEACON CHAIN until the withdrawal is possible.
Becoming an Ethereum validator requires you to run a node, which requires you to run dedicated hardware, electricity & maintenance. While our Setup main goal is to reduce the technical burden of setting up your node and maintaining it, you should also try to learn as much as possible about what the validator actually does, when you use it. This is especially necessary, if you should run into individual problems you are having with your hardware. The risk is, if your validator goes offline unexpectedly and you aren’t completely on top of things, to get penalized & lose your investment partly or even completely!
The one factor that is mostly out of your control is how good your Internet performs on average. To clarify: You will not get slashed if your node is not online. What happens is just that you lose ETH at about the same rate you would earn it if you were online, therefore it is less of a problem than it may seem. Still, if you want to turn a profit you should try to have a high up time. A connection that tends to disconnect could easily make you miss out on rewards and a backup internet connection is something most people aren’t reliant upon. ONLY stake if you are convinced that your connection is stable enough to keep your node online 24/7 – to maximize your profits and reduce the risk of getting slashed by having to migrate your keys.
If your node gets hacked, you will probably lose all your ETH. If someone gets access to the machine your computer runs onto, then they could very easily compromise your funds. We recommend taking extra measures to ensure that this can’t happen: Don’t run anything but Stereum on your server. Don’t open any unnecessary ports or play around with the system.
If you go into staking without any experience we recommend to get hardware with the following specs to ensure a smooth validation process and minimize your own risk:
To SOLO STAKE you will also need to get a hold of 32 ETH!
Note: Consider changing the selection to a Minority Client by clicking execution / consensus client in the menu to support the network.
You can check out Client Diversity Data by visiting https://clientdiversity.org/
NOTE: For security reasons, we recommend you disconnect from the internet to complete the next steps involving validator key generation