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The choice between your own node and a stakeout service

June 18, 2020

As the Ethereum 2.0 update approaches, Users have shown increasing interest in the staking process that would allow them to generate residual income by validating the new network.

This is evidenced by the increasing number of ether (ETH) wallets and ETH deposits on cryptocurrency exchanges. After a report recently published by the analysis company Arcane Research, andThe number of Ethereum purses with 32 ETH or more – the minimum amount of coins required to operate the stakeout node – has increased by 13% over the yearand the number of Google searches “Ethereum 2.0” It has grown about six times since March.

While some users have already decided to operate their own validation nodes, others continue to choose to become independent validators, to join a task force, or to use the services of a stake provider. But is there really a difference?

How will staking on Ethereum work?

The choice between your own node and a stakeout serviceThe choice between your own node and a stakeout service

By updating the Ethereum network, the PoW algorithm (Proof of Work) is shifted to the PoS consensus algorithm (Proof of Stake). Replacing miners with auditors who use their coins to verify transactions. Once the verifiers have verified the honest transactions, they receive the rewards in the form of a passive income – this process is called staking out.

The exact amount of an annual reward for Ethereum stakers is not yet known. According to the project roadmap This value varies between 1.56% and 18.1% and is inversely proportional to the total number of validators: as the network grows, the rewards are awarded.

On the one hand, a stakeout model can be attractive to a wide range of cryptocurrency users because it does not require expensive mining equipment or special technical knowledge, and it appears as simple as a bank deposit. To receive the annual interest from the resources, the ETHs only have to be kept in a hardware wallet.

However, a thorough analysis of the requirements to become an Ethereum network validator has shown this Not everything is as simple as it may appear at first glance. The minimum entry threshold of 32 ETH is just one of these requirements.

For example, given the ETH exchange rate of $ 250, The user has to invest $ 8,000 to become a validator of the Ethereum 2.0 blockchain. But what about the reward? Given the validation cost of $ 180 and an average reward of 5% suggested by Ethereum developer Justin Drake, the annual profit from the 32 ETH bet can be around $ 190. Given the potential risk of ether price fluctuation and the fact that users cannot withdraw money, it is unlikely that the average user will get a big prize with this reward model.

Another task that users have to deal with to be a full validator is to run their own validator node. According to a survey published by Consensys, 33% of ETH users are ready to carry out this task. But that’s not all. Validators would also be required to ensure uninterrupted operation of the hardware wallet. When users go offline, they lose all of their daily income. Even worse, if your deployment falls below 32 ETH at any time, users lose the right to be validators.

The entry threshold for Ethereum deployment is not as high as the cost of operating a master node on other blockchain networks like Dash. For many users, high barriers to entry may be prohibitive. The same Consensys survey also showed that 33% of ETH owners do not intend to join the operational network, and 71% of those who refused said they did not have enough ETH to become validators.

Third-party services help

The above restrictions can be avoided if you join a stakeout group or service providers. These third-party services – decentralized or centralized – offer to operate on behalf of users and to relieve them of the need to worry about introducing special software or maintaining the network online for the duration of the deposit. If the start of the node itself can be compared to opening a deposit account with a bank, the stake service providers act as brokers and assume all maintenance risks and costs for a certain fee.

The greatest advantage of these solutions is the ability to gain the share with any amount of ETH, which becomes a point of sale for many users who cannot afford to maintain their own nodes. According to Consensys At least 33% of Ethereum users plan to use third-party services, and 20% of those who previously expressed the intention to operate their own validation nodes said they would consider using an emergency service instead. This raises the question: what is the best option, a stake pool or a stake service provider?

Use as an exchange service

Nowadays, many cryptocurrency exchanges offer coin service operations based on the PoS algorithm with daily income payments. For example, Poloniex has no requirements regarding the deposit conditions: the user can trade and withdraw money at any time. However, Therefore, users are charged a share of 25% of their rewardswhich is intended to cover the operating costs and risks associated with the administration of the service.

Another major cryptocurrency exchange, Bitfinex, claims that it does not charge any fees for its current deployment programs, but retains a small portion of the rewards earned through the deployment. Furthermore, As indicated on the Bitfinex website, your service provider can in some cases also claim part of the bonuses earned through the exchange.. Meanwhile, The operational services offered by Bitfinex are available to any user category, as it is enough to have only $ 0.10 to receive bonuses on the platform.

Bitfinex Chief Technology Officer Paolo Ardoino announced to Cointelegraph that the exchange has Ethereum’s largest cold wallet on the market and plans to be an important part of Ethereum’s stake. According to him, using Ethereum will be very profitable for users who keep their money on exchanges:

“Exchanges like Bitfinex charge a small fee to cover operating costs, but the vast majority of premiums go straight into users’ pockets. Not all users want to go through the process of keeping their own assets safe and learning how to do this properly.”

Changpeng Zhao, also known as CZ, the CEO of Crypto Exchange Binance, told Cointelegraph that users who actively participate through Binance can earn higher interest rates than those who only have cryptocurrencies in their accounts:

“Binance will use a fraction of the ETH held by our users as we still need some funds to be liquid so that users can withdraw them at any time while the rewards are automatically distributed proportionally to our users.”

Another advantage of central platforms and custody services is that they take care of converting the user’s ETH to ETH2. For example, the cryptocurrency service provider Bitcoin Suisse claims that it does not charge a commission for such a conversion. You will receive 15% of the premiums received from your customers. The platform also promises to monitor the timely update of its own software so that the deployment process is not interrupted and is beneficial to the user.

However, according to some users, the stakeout programs offered by cryptocurrency exchanges can lead to the centralization of the Ethereum blockchain. Speaking to Cointelegraph, Sergey Zhdanov, CEO of Cryptocurrency Exchange EXMO, said that while the exchange will definitely become the network’s greatest validators, the impact will be inseparable:

“Data from Arcane Research and Nansen AI show that Ethereum wallets with at least 32 ETH, the amount required to use ETH 2.0, grew by 13% this year. The number of these wallets is over 120,000 a year what the Wallets only take 1% of them. “

In addition to the exchange of cryptocurrencies, the custody services provided by some institutional actors also appear to be willing to offer these services. According to a report by PricewaterhouseCoopers, 42% of crypto hedge funds are also involved in crypto staking.

Related: ETH miners will have no choice once Ethereum 2.0 PoS is released

Zhdanov also noted that many large players are likely to use ETH themselves to hedge their portfolio risks, and that ETH’s popularity with the other altcoins that work with PoS will help reduce the risk of centralization.

Regarding the likelihood of centralization, Ardoino of Bitfinex told Cointelegraph that this threat may only be possible in the early stages of the update, adding: “Clarifying the importance of using your own wallets will be a key factor in reducing centralization. “.

In addition, plugging is particularly effective in stabilizing cryptocurrency prices, according to CZ, as it encourages users to shop in the market when buying tokens, as well as rewards that limit sales orders rather than orders. in the market as users continue to earn rewards while their order is pending. He added:

“During drastic declines, users are asked to set limit orders to sell them instead of unloading them in the market and during bullish periods, users are asked to enter faster.”

Decentralized pegging basins

Staking out groups or decentralized exchanges can be an alternative for those who are concerned about possible centralization and the penalties that may apply for offline use, for example. As the decentralized nature implies, everything from rewards to risks it is distributed among the members of these groups.

For example, the Rocket Pool decentralized stakeout pool states that a user’s deposit cannot be attributed to a “bad node” because all members of the pool share the risk of nodes being cut off and hence the size of the penalty. Consequently, If a node fails, each group member loses a small amount of money. However, when a node is executed, there is a risk that the user will lose everything.

In addition to the Socialized Loss Calls, Rocket Pool has introduced its native token, which is a Tokenized Staking Deposit and enables the Stakers to immediately receive a reward and withdraw it at any time. In addition, the pool does not charge a fee for use. To join the pool Individual users must have at least 0.01 ETH, while those wishing to run Rocket Pool Smart Node software need 16 ETH – half the minimum amount required to run a single Validator node., but would require much more than cryptocurrency exchanges.

What do users say?

The entry threshold to become an Ethereum validator is the most discussed topic among users interested in using it. Many of them argue that 32 ETH is too much, pointing out that there would be many more validators in the new network if the required amount were less.

Others said they would not commit to the 32 ETH just to secure the Ethereum network unless the stake was more than 10% a year because the potential profit is negligible compared to losses in the event of a price drop could be currency. Although the exact amount of the reward for use is still unknown, Many users who have announced their plans to use third-party services have already announced that they will choose the platform that offers at least 7.6% of sales.

There are also those in the crypto community who seem more concerned about the danger of centralizing the Ethereum than the cost of the operation.. However, they appeared to be a minority. Remarkably, a significant proportion of users favored the 32 ETH entry threshold and compared that amount to the tens of thousands of dollars required to have master nodes in blockchain networks like Dash’s.

While the Ethereum 2.0 release date is still open, users have time to decide whether or not to participate in the mission and how exactly they want to do so. As the examples examined in this article show, almost any cryptocurrency user can become a validator of the new network and receive residual income regardless of their financial and technical capabilities.