The launch of Ethereum 2.0 is especially significant compared to past upgrades because of the implementation of a Proof of Stake consensus mechanism, moving the network away from its existing Proof of Work architecture.
Proof of Stake (PoS) is the most significant change in Ethereum 2.0, because it reforms the crypto-economic incentive structure for validating the blockchain. Ethereum’s current architecture is maintained by a Proof of Work (PoW) consensus mechanism. The components of Proof of Work is the architecture used for the most utilized blockchains to date, including Bitcoin, Ethereum, Litecoin, and more. In Proof of Work, miners run nodes and expend computational energy to solve complex mathematical problems in a competition to mine the next block.
The time and money that miners need to run hardware and expend electricity on PoW chains is validated by block rewards, which are distributed to miners who successfully mine a block into existence. PoW chains are extremely secure; the combined computational power required for an individual to compromise a well-established PoW blockchain like Bitcoin or Ethereum would cost an extraordinary amount of money, and may not even exist. Although extremely secure, PoW blockchains suffer from scalability and accessibility issues. Another level deeper, electricity costs are often reduced for businesses and corporations, meaning a miner looking for maximum profitability would also need to form a company and purchase enough mining hardware to justify their effort. Several of the largest mining conglomerates outcompete the majority of regular blockchain users from actually participating in the maintenance of the network, leading to centralization of miners. In Ethereum 2.0, one of the goals is for PoS to level the playing field for more individual validators to participate, earning a shared return on maintaining the truth of the network.
Proof of Stake replaces the two primary components of PoW (miners & electricity) with validators and stake on Ethereum 2.0. Broadly speaking, validators replace miners as the individuals who maintain the agreed-upon state of the network and receive rewards for randomly selecting the next block of data. PoS provides those with a stake of network tokens the right to earn rewards for validating blocks. This is in contrast with proof-of-work,. PoW assigns block confirmation rights to those that demonstrate the largest amount of computing power. Once a validator agrees to stake its tokens, the stake is locked up. Unlike in PoW, in which miners expend physical energy (called hash power) by burning electricity to confirm blocks, validators in a PoS system commit 32 ETH as ‘skin in the game.’ The rate of return for staking ETH is expected to be around 4%–10%. A program called “slashing” will apply to any validator acting maliciously toward the network by taking a portion of the validator’s stake.
On Ethereum 2.0, validators will stake at least 32 ETH by depositing the funds into the official deposit contract that has been developed by the Ethereum Foundation. Validators will download and run Ethereum 2.0 client software. Validators who correctly propose and attest to blocks will receive a reward of ETH as a percentage of their stake.
Though becoming a validator has a lower barrier to entry than becoming a miner just by virtue of the elimination of hardware costs, the fact is that not many people own 32 ETH or are willing to risk staking nearly $7500 (~$233/ETH at the time of writing). There are two solutions to the barriers to entry that are currently anticipated on Eth2. To overcome the technical knowledge of running one’s own client, companies are beginning to offer staking services through which they will manage the client operation for an individual who stakes 32 ETH in exchange for a small fee. Should an ETH holder only wish or be able to stake less than 32 ETH, she may join a staking pool, where her funds are pooled with others’ to reach the required 32 ETH. Her rewards, then, would be proportional to her total contribution.
The most obvious benefit of staking is the opportunity to generate income from holding crypto. Staking also provides an opportunity to be an active participant in your favorite blockchain projects. However, by staking, users lock up their cryptocurrency holdings for a defined period. This means that if there’s a sudden market crash, they won’t be able to pull their crypto out of the staking program to sell and mitigate any losses. Even in the event of a smaller market downturn, the value of rewards may not cover the reduction in the value of the crypto. When participating in a staking pool, people need to be aware that someone else may be taking custody of their cryptocurrencies, and that comes with some risk.
Source:
https://consensys.net/blog/blockchain-explained/what-is-ethereum-2/#:~:text=Ethereum%202.0%20(Eth2)%20is%20a,adoption%20by%20improving%20its%20performance
https://cointelegraph.com/explained/ethereum-20-staking-explained
