Staking After Ethereum 2.0 Upgrade Will Not Yield Significant Profits

The developers of Ethereum (ETH), the world’s largest platform for building and deploying decentralized applications (dApps), are planning to change the blockchain network’s current proof-of-work (PoW)-based consensus protocol to a proof-of-stake (PoS)-based consensus algorithm.

Transaction Validators Might Not Earn Sizable Profits After Ethereum 2.0 Upgrade

Several analysts have argued that transaction validators on the Ethereum network who use their own hardware, instead of using Cloud-based services such as Amazon Web Services (AWS), have better chances of earning greater profits. However, recently compiled data suggests that validating transactions on the Ethereum blockchain, after the set of upgrades associated with Ethereum 2.0 have been activated, will not yield significant returns on investment (mainly the staked amount).

According to a proposal by Ethereum co-founder, Vitalik Buterin, transaction validators on the smart contract platform may receive 5% interest (per annum) on a minimum deposit of 32 ETH, an amount currently valued at approximately $5,440.

This roughly equates to an annual return of around $250 in Ether. However, if we factor in the costs associated with purchasing and maintaining new hardware equipment and electricity consumption, then the profits earned by Ethereum network transaction validators is reduced to only around $41 (on a 32 ETH deposit) - which is merely a 0.8% return on investment (ROI).

Transaction Validators Would Have Operated At A Loss Under Previous Schedule

Under the previous reward issuance schedule, transaction validators would have operated at a loss as the net yield was -1.87% - at an Ether price of $160. This, according to Collin J. Myers, the Digital Token Strategy Head at ConsenSys, who told Coindesk:

When you include the expenses of running your own machine in your own home, the net yield is 0.80%. So, it’s low but it’s positive compared to the last time it was not positive.

Despite the relatively low rate of returns, Ethereum network participants, under the previous reward issuance schedule, would only have been able to make profits if they were among the first 300,000 on the blockchain-based platform to stake their funds.

However, the latest issuance schedule will reportedly allow the first one million transaction validators to earn profits (not just the first 300,000). As confirmed by Tanner Hoban, the Director of ConsenSys Capital, the new issuance schedule would yield significantly more returns when Ethereum 2.0 is activated. Hoban noted: “I think it provides stronger security for the network and I think it enables more confidence in the network.”

Meanwhile, Eric Conner, an Ethereum project contributor who recently joined Gnosis, a decentralized prediction markets platform, stated:

I think we’ve hit that sweet spot between security and making sure we hold on to ether being a store of value and being programmable money and not over-issuing.

Proof Of Work Security Budget Is A Lot Higher Than Proof Of Stake

Commenting on the (new) ETH issuance rate, after PoS is activated, Conner said:

We’re [currently] creating like 4.8 million Ether a year [through proof-of-work based consensus] to pay miners so it’s a lot higher security budget but proof-of-stake introduces a new paradigm there.

Significantly, Conner estimated that there would only be around 100,000 new ETH created each year - when Ethereum 2.0 goes live - assuming at least 30 million Ether is being staked on the Ethereum network.

Conner explained:

The reason for that is there’s different styles of attack…There’s very different attack vectors in proof-of-stake. One of the major benefits of Ethereum 2.0 proof-of-stake is that if there’s a bad actor, their [staked] Ether can be slashed. So people obviously don’t want to burn any amount of value.