How to Mine Ethereum: Everything to Know
By Beluga Research October 7, 2023
- Ethereum transitioned from a proof-of-work (PoW) mining consensus mechanism to a proof-of-stake (PoS) consensus mechanism
- Staking is locking up ether (ETH) tokens to help validate transactions and secure the network
- Staking is more energy-efficient and scalable than PoW mining
- There are many ways to stake ETH, including exchanging, validators and liquid staking platforms
Ethereum is one of the world's most popular and innovative blockchain platforms. It powers various decentralized applications, or dapps, including smart contracts, DeFi protocols and NFT marketplaces. Ethereum used to use a proof-of-work (PoW) consensus mechanism to secure its network. In PoW mining, miners compete to solve complex mathematical puzzles to validate transactions and earn ETH rewards. However, PoW mining was energy-intensive and could be centralized in the hands of large mining farms.
This has led to concerns about the sustainability and scalability of Ethereum. To address these concerns, Ethereum transitioned to a proof-of-stake (PoS) consensus mechanism. In PoS, validators stake ETH tokens to validate transactions and secure the network. Validators are randomly selected to validate transaction blocks and are rewarded with ETH. Staking is more energy-efficient and scalable than PoW mining.
A Brief History
Ethereum was conceived in 2013 by Vitalik Buterin. Buterin was inspired by the potential of blockchain technology to revolutionize many industries. However, Buterin believed that Bitcoin was too limited in its scope. In November 2013, Buterin published a white paper outlining his vision for Ethereum. In July 2014, Buterin launched an initial coin offering (ICO) to raise funds for the project. The ICO was a success, raising over $18 million in ETH. The first public release of Ethereum, Frontier, was launched in July 2015. Frontier was a bare-bones platform that was intended for technical users. Over the next year, the Ethereum team released a series of updates that added new features.
In 2016, Ethereum experienced its first significant challenge. A hacker exploited a vulnerability to steal over $50 million worth of ETH. This event led to a hard fork of the Ethereum blockchain, creating two separate chains: Ethereum and Ethereum Classic. In 2017, Ethereum experienced a significant price increase. ETH surged from around $10 in January to over $700 in December. This price increase was fueled by investor excitement about the potential of Ethereum and dapps. In 2022, the Ethereum team completed the Merge. This transitioned the platform from a PoW consensus mechanism to a PoS consensus mechanism. This transition has made Ethereum more energy-efficient and scalable.
What is Ethereum?
Ethereum is a decentralized blockchain platform that allows developers to build and deploy dapps. It is the second-largest cryptocurrency by market capitalization. Ethereum is powered by its native cryptocurrency, ether (ETH). This is used to pay for gas and dapps on the Ethereum network. The total supply of ether is not capped like Bitcoin. Ether has an annual issuance rate of 18 million ETH.
Ethereum is unique because it is Turing-complete. This means it can be used to create any application, from simple financial contracts to complex decentralized organizations. Ethereum formerly used a PoW mechanism to secure its network. It shifted from a PoW consensus PoS consensus mechanism, as PoS is a more energy-efficient and secure way to validate transactions and add new blocks to the blockchain. Ethereum has a market capitalization in the hundreds of billions and over 116 million ETH coins in circulation. There are over 3,000 dapps built on Ethereum.
Ethereum has transitioned to a staking chain with the introduction of the Beacon Chain. Staking is the process of depositing 32 ETH to activate validator software. Validators are in charge of storing data, processing transactions and adding new blocks to the blockchain. This contributes to the security of Ethereum while also providing validators with additional ETH. Staking is a public good for the Ethereum ecosystem. Any ETH user can help secure the network and earn rewards. The total amount of ETH staked, validators and current APR can be found on the Ethereum website. The shift to staking was completed in September 2022 with the Merge upgrade. This upgrade marked a significant milestone in Ethereum's development, making the network more scalable, secure and sustainable.
- Choose a staking method. There are three main ways to stake Ethereum: Validator, staking pool and centralized exchange. Validator is the most direct and challenging method. A staking pool is a more accessible option for smaller investors. Centralized exchange is the most straightforward option but offers the lowest rewards.
- Set up a compatible wallet. Once the user chooses a staking method, the user must set up a compatible wallet. Some popular wallets for ether staking include Ledger Nano, MetaMask and Coinbase Wallet.
- Fund wallet and transfer ETH. Once a user has set up a wallet, the user must fund it with ETH and transfer it to the staking platform.
- Choose your staking options. If the user is using a staking pool, choose staking options. This may include selecting the type of staking pool users want to join, the validator user wishes to delegate ETH and the amount of ETH the user wants to stake.
- Start staking and earn rewards. Once a user has chosen staking options, the user can start staking ETH and earning rewards. The rewards a user earns will depend on the chosen staking method and the amount of ETH user stake.
- Slashing Protection. Ethereum staking deters bad actors with slashing. If a validator misbehaves by signing two conflicting blocks, the validator's stake can be slashed. This means the stake is reduced, and the validator may be penalized further. Slashing protection is unique to Ethereum staking and helps ensure the network is secure and reliable.
- Delegating. Ethereum staking allows users to delegate ETH to other validators. This means users can participate in the consensus process without running a node. Delegating in Ethereum staking enhances accessibility for users without technical expertise or resources to run a node.
- Validator Diversity. Ethereum staking is designed to encourage diversity among validators. This is done through several mechanisms, such as slashing and minimum stake requirements. Validator diversity helps ensure the network is secure and reliable. It also helps to prevent centralization.
- Environmental Benefits. Ethereum staking is more energy-efficient than the previous proof-of-work consensus mechanism. This is because staking does not require miners to compete with each other to solve complex mathematical puzzles. The environmental benefits of Ethereum staking are unique to this consensus mechanism.
- Future Proofing. Ethereum staking is designed to be a future-proof consensus mechanism. It can scale to support more users and transactions than Ethereum's previous Proof-of-Work consensus mechanism. It makes Ethereum more attractive to developers and users.
- Support the Ethereum network. When users stake ETH, they are helping to secure and validate the Ethereum network. This is a valuable service that helps to keep the network running smoothly and efficiently.
- Reduced energy consumption. PoS is a more energy-efficient consensus mechanism than PoW. PoS does not require miners to use specialized hardware to solve complex mathematical problems.
- Increased decentralization. PoS is also more decentralized than PoW. Anyone with ETH can participate in staking, regardless of computing power. This helps to reduce the risk of centralization.
- Simplified participation. Staking Ethereum is becoming increasingly easier to do. Several staking pools and services make it simple for anyone to participate. This makes it easier for more people to support the Ethereum network and earn rewards.
- Long-term investment. Staking Ethereum is a long-term investment strategy. This is because users need to lock up ETH for a certain period to participate in staking. However, the rewards can be significant over the long term.
- Validator penalties. Validators can be penalized for failing to participate in the consensus process correctly. This can happen if a validator is offline for too long or if it validates incorrect transactions. Penalties can reduce the rewards that a validator earns.
- No guarantee of rewards. Staking ETH can yield passive income, but validator rewards are uncertain. This is because the rewards are distributed based on the amount of staked ETH. The Ethereum network's overall performance also influences the distribution. If the network is congested, then stakes may earn lower rewards.
- Platform hacks and government actions. Centralized staking platforms can be hacked or shut down by governments, leaving stakers with no access to staked ETH. This is because centralized platforms hold users' ETH in custody.
- Fees. Stakers may have to pay fees to use a staking platform or to participate in a staking pool. These fees can reduce the amount of rewards that a validator earns.
- Volatility of ETH price. The price of ETH is volatile, which means that the value of staked ETH can fluctuate significantly. This means that stakers may lose money if the price of ETH falls below the cost of the initial investment.