If you’re getting into staking ETH on the beacon chain, it’s important to know what you’re actually signing up for. There’s lots of articles about how easy it is and how awesome, intelligent and good looking stakers are, so here’s a few hard truths you should make sure you’re ok with…
Short Term Stuff
Most people know this stuff so I’m just going to skim over it.
No Withdrawals Yet
You can’t withdraw staked ETH or rewards yet. There isn’t a fixed timeline on when you will be able to.
Rewards on the beacon chain are not automatic – you actually have to run a node and perform the assigned duties. If you fail to perform the duties, instead of a reward you’ll actually get a small penalty.
If lots of validators aren’t performing their duties well at the same time and the chain stops finalising, those small rewards will gradually get bigger and bigger.
If your validator signs something that’s self-conflicting (ie not just wrong but disagreeing with what you’ve previously said) it can be slashed. This is a bigger penalty and your validator is immediately deactivated so you can’t earn any more rewards (and still can’t withdraw). How big depends on how many other validators are slashed at the same time – it can be anything from 0.5ETH to your entire stake).
Rewards Automatically Reduce as Validators Activate
As more validators begin staking, the rewards paid are automatically reduced. So while you might have earned 0.00004 ETH for a correct attestation last week, this week it may be only 0.00003 ETH, and next week it may be even less.
Which brings us to the first key principal you should be ok with…
Pay the Minimum Amount Possible to Secure the Chain
The philosophy of Ethereum is to pay the minimum amount possible to ensure the chain remains secure. This applies equally to miners in Eth1 and stakers in Eth2. That’s why rewards automatically reduce when there are more active validators – the chain has enough validators to be secure so it doesn’t need to provide as much incentive for staking. But it goes well beyond that.
The algorithm for determining those rewards may itself be changed to further reduce them if in the future it’s deemed that security would still be sufficient. There is absolutely no guarantee of any rate of reward.
In fact, there is already one proposal that could reduce rewards which was considered for the first protocol upgrade but ultimately seen as unnecessary. Specifically the proposal was to cap the number of validators that can actually be active at any one time, with the rest being dormant (so not earning any rewards) and randomly cycle which validators are dormant. It was seen as unnecessary because even if we continued activating validators at the maximum possible rate, it wouldn’t hit the cap and activate these changes for at least another year. At some point though it’s likely to be implemented as it provides important reduction in the load required for nodes following the chain.
Which brings us to…
Ethereum Puts Itself First
Whenever there is a trade off being individuals or groups and the safety, security and reliability of the Ethereum chain, the Ethereum protocol and Ethereum developers will always prioritise the chain first. After all, if the chain isn’t working no one can benefit from it.
Some examples of this in the beacon chain are the long delays before deposits activate – the chain is ensuring the validator set doesn’t change too fast because that’s a security risk. The fact that you have to wait 2+ weeks for your validator to activate is just unfortunate for you.
Note though, that this isn’t intentionally capricious. If the chain would function just as well either way, then sure, make the protocol as nice to people in any role as possible. This also ties into paying the minimum amount for security – if we can make the staking experience better in some way (that doesn’t reduce security) then people will likely be prepared to stake for less money and rewards can be reduced.
Ethereum Does Not Exist To Make Stakers Rich
This is really just an extension of the previous two, but it’s worth being extra clear. Staking is fun for the whole family and everything but it really is just a means to an end – providing security for the Ethereum chain. You can lose sight of that because at the moment the beacon chain’s only function is staking but that’s just a temporary thing. Ultimately Eth1 will merge in and all that staking will just be to provide security for contracts and transactions on the chain.
Remember, stakers are service providers to the network and they’re paid for their services with rewards.
Different people have different views on exactly what the point of Ethereum is (world computer, digital asset, money, all of the above?) but it’s definitely not to make stakers rich. Don’t expect any sympathy if it winds up being hard to make a profit – unless security is at risk, rewards won’t be increased (“Pay the Minimum Amount Possible to Secure the Chain” remember?).
Change Is Inevitable
Ethereum is a blockchain that has always and will continue to change and upgrade. There are an unusually large number of big changes coming as the collection of technologies referred to as Eth2 roll out, but it won’t ever stop. There will always be new ideas to take advantage of and new problems to solve.
Those changes will be (or at least are intended to be) great for Ethereum overall, but they might not be for any particular person or group. They might mean stakers need more resources to keep up (e.g. the merge requiring running a full Eth1 node), they might affect reward rates or any number of other things. Just because something is true today, doesn’t mean it always will be.
The Good News
That all sounds pretty doom and gloom, but the good news is that staking is entirely optional. There are plenty of other places you can put your money if you don’t like the deal that staking is offering.
Most importantly, once withdrawals are possible, it’s also really easy to stop staking and get your stake back (assuming you didn’t go getting yourself slashed badly…). It’s like if you could buy a mining rig with a guarantee that it could be sold for the original price when you’re done with it and you get to keep whatever profit or loss you’ve earned.
PS: I’ve been informed that staking also doesn’t guarantee to make you awesome, intelligent or good looking.