Ethereum is the second largest blockchain by market cap, and was the first to introduce the wide use of smart contracts to power decentralized applications. Its upcoming merge has been hyped a lot, and Ethereum has seen its value move on an upward trend in anticipation of the upcoming merge.
What you need to know as an Ethereum investor in Africa
Why is it called the “Merge”?
The merge is the formal “merging” of the execution layer of Ethereum (the Mainnet) with the Beacon Chain, its new proof of stake consensus layer. The Ethereum network is thereafter secured using staked Ether and mining on proof-of-work will no longer be a valid means of block production.
What is Eth1 and Eth2 all about?
'Eth1' and 'Eth2' have developed due to confusion around the merge and two “distinct Ethereum networks”. There will only be one Ethereum after the merge (the Proof of Stake chain) and both the consensus and execution layers will become one. No need to read further meaning into it, and any new “Eth2.0” token that may appear after the merge is purely a speculative token of a forked chain.
Will the Merge reduce gas fees?
No, the merge results in a change of consensus mechanism, and will not necessarily bring about an immediate reduction in gas fees. However, when sharding is fully implemented, and more nodes join the chain, an expansion of network capacity and throughput is on the horizon. Coupled with the continued usage growth of Layer 2 solutions, gas fees should be expected to be consistently reduced after the merge.
Will all my ETH remain intact? Do I need to do anything?
No need to do anything with your wallet or withdraw your funds before or after The Merge. Ethereum’s entire history since genesis will remain intact and unaltered post-Merge and all your funds are still accessible after the merge. Beware of scams telling you to “upgrade” your ETH
I want to be an Eth Validator. Do I need to stake 32 ETH to run a node: Anyone is free to run a node on the Beacon Chain and there is no maximum ETH level required. However, you need 32 ETH to run your own validator node; so if you don’t have up to that, you can try pooled staking
When will I be able to withdraw Staked ETH upon Merge? Withdrawals will not be enabled with the merge, although an upcoming update will enable staking withdrawals. Your staked ETH stays locked immediately post-Merge. Eth stakers can unstake their tokens after a new “update” to the chain, known as the “Shanghai Update”. There are yet to be details by the Ethereum Foundation on when this update will happen.
Background to the Merge
Ethereum is the second largest Proof of Work chain, outside Bitcoin. However, due to network congestion on the Ethereum mainnet and the need to scale its operations while ensuring security, Ethereum is planning an upgrade through a process called the “Merge”. The Ethereum Merge is a multi level upgrade of the Ethereum chain designed to increase the security and scalability of the network through critical infrastructure changes. The main modification is the planned switch from a proof-of-work (PoW) to a consensus proof-of-stake (PoS) model.
With this new model, Ethereum investors can now decide to secure the chain by staking their tokens to ensure the security and governance of the network. A “validator” or “staker” is someone depositing their ETH tokens to secure the network, in exchange for a staking reward. After months of speculation, it is finally confirmed that the Merge is tentatively expected to be between September 15th-16th, 2022. However, the estimated date could extend up to 20th September or later.
Ethereum first began the Merge process through a 3 phase testnet (test networks); Ropsten, Sepolia, and Goreli testnets. The last testnet, Goreli, was concluded a few days ago. So now, Ethereum is on the verge of executing the actual Merge on its mainnet.
Ethereum’s Proof of Stake Consensus Layer explained
Proof-of-stake is a consensus method that blockchain networks utilize to reach distributed consensus. It is used by the other Layer 1 chains including Avalanche, Solana and Cosmos.
It is a process used by these blockchains to secure the blockchain and generate new blocks by selecting validators randomly who operate the network nodes to achieve consensus.
The validator's chance of getting chosen to produce/validate a block is proportional to the number of coins; the higher your stake in the network, the higher your chances of being randomly selected. As a result, anyone with a predetermined number of coins can engage in staking and earn additional coins in proportion to their staked amount.
So, Ethereum’s Merge plans to use this model to improve its scalability and security. This upgrade is needed to ensure security and scalability while reducing energy consumption, alleviating bottlenecks and accommodating more use cases, particularly outside of DeFi.
The staking model will replace Ethereum's existing mining process, drastically reducing energy consumption by over 99%. By allowing investors to stake their tokens to secure the network, it promotes active participation in transaction validation. Anyone with the minimum necessary cryptocurrency balance can validate transactions and earn staking rewards on these blockchains.
Although not an immediate consequence of the Merge, a PoS should also increase network throughput; Ethereum currently handles 15 transactions per second, extremely slow for all the activity going on on-chain. The fastest blockchains like Avalanche and Solana all operate Proof-of-stake models, so it is plausible to expect the Merge to enable processing power upwards of 100,000 transactions per second.
This is largely done through the introduction of shards to the network; this allows transaction blocks and validators to be split into different shards, all while connected to the Beacon Chain. Every block can be voted on, and validated simultaneously without the need for one miner at a time model of Proof of Work.
How will Ethereum PoS work?
To become a validator on the new Ethereum PoS network, you must stake your Ether token (the native token of the blockchain). Validators, like miners in proof-of-work, are in charge of arranging and validating transactions and constructing new blocks so that all network nodes can agree on the network's state.
Ethereum Validators are responsible for processing transactions, storing data and adding blocks to the Beacon Chain. Validators receive rewards on their staked coins, which are denominated in Ether, as a reward for their active participation in the network.
The Eth PoS-powered blockchain bundles 32 blocks of transactions during each round of validation, which lasts on average 6.4 minutes. These groups of blocks are called "Epochs". When the chain adds two additional epochs after it, it is considered irreversible (finalized).
The Beacon Chain divides stakers into a ‘committee’ of 128 and randomly assigns them to a specific block. Each committee is allotted a ‘slot’ and has a set time to propose a new block and validate the transactions in the block. Each epoch has 32 slots, requiring 32 sets of committees to complete the validation process.
Once a committee has been assigned to a block, one member at random is given the exclusive power to propose a new block of transactions. In contrast, the remaining 127 members vote on the proposal and attest to the transactions. Validators are assigned to produce blocks at random and are accountable for double-checking and confirming any blocks they do not make.
The validator’s stake is also used to incentivize positive validator activity. For example, a validator may lose a portion of their share if they go offline (fail to validate) or lose their entire investment if they engage in willful wrongdoing (known as slashing). Also, users may be able to delegate their stake to another user who can perform the duties of a validator on their behalf, known as delegated staking.
What rewards accrue to Validators?
The primary reward to be gotten from investing your Ether is to obtain the APY, or annual percentage yield. If you are pooling your stake, APYcan range from 6% to 15% depending on where you are staking. If you are running an independent node with a minimum need of 32 ETH, your APY should theoretically be higher depending on network rules.
The amount awarded to stakers is determined by the total amount of Eth invested and the number of validators on the network. The rewards should continually fall as the stakeholder pool grows large enough to support a decentralized ecosystem. However, stakers cannot withdraw coins staked or rewards earned until the Shanghai Upgrade.
Thankfully, Ethereum staking does not require significant investments in hardware or energy, and you can also join staking pools if you don't have enough ETH to stake
How do I stake my Ethereum?
You can stake on Ethereum in a variety of ways. You can choose to use Custodial staking systems, which handle the complete staking process on your behalf and pay you the rewards. You simply deposit Ether, and they will set up the node for you. They also run and manage the node for you, so you don't have to. More on these below.
However, you do not control the Custodial validator node's private key. Just like centralized exchanges, they are in charge of and manage your assets. They also take a cut of your rewards in exchange for their services. The inherent risk here is a risk of bad behaviour by your custodial validator, which may result in slashing penalties or losing your stake altogether. Be careful of the custodial validator you choose to use.
Individual staking requires setting up a staking node using Ethereum RPC software clients. These are applications that allow nodes to communicate with the Ethereum server. Examples include Blockdaemon and Quicknode.
Validators must keep their nodes connected to the blockchain at all times. As a result, a good internet connection is a must-have. After you've installed the validator software on your computer, you'll need to send at least 32 ETH to the Ethereum staking contract address.
To do so, you'll need to generate two keys: one for signing and validating transaction blocks and another for withdrawing your cash. However, until the full completion of the Merge, you won't be able to create your withdrawal key.
Read more here.
Potential Risks of Eth Staking
- Ether, like all other crypto tokens, can be subject to high volatility, so be mindful of fluctuating prices especially if you are not a long term investor
- If you start a node or invest in a pool, it is unclear when you can unstake. Staking means locking your tokens, so if for any reason whatsoever you want to sell some (maybe during a bull run to take profit, or doing a dip to cut losses) it may be difficult to do so
- You may also lose your staked assets due to slashing. Be sure you are always going to be available, so you won’t be punished for a network or validator failure
- On the other hand if you decide to use a Custodial staker, be mindful of who you choose; if they get slashed, all the delegators (those that chose them as their validator) will be equally punished with losing their tokens
- Staking may not be an ideal option if you trade or use Eth regularly; you have to lock up your Eth for long periods of time, even years to earn good rewards
Where to stake your Ethereum
Check the Ethereum website for comprehensive information and a walkthrough on how to stake as an independent node. If you are more comfortable with pooled staking, we will go over 5 protocols that enable pooled Eth staking for investors. There are currently no pooled staking solutions by African exchanges, so all the listed options are foreign projects. As usual, do your research before deciding to stake your assets in any project.
Rocket Pool is an Ethereum staking pool protocol. The interesting thing about Rocket is that it reduces both capital and hardware requirements to stake on ETH, allowing both independent stakers and delegators to use it. The platform provides infrastructure and liquidity for quick withdrawals and low staking requirements. RPL token is the protocol’s monetary and governance token.
Rocket Pool relies on smart contracts to ensure decentralization and permissionless staking. Users can deposit as low as 0.01 ETH to start earning rewards, which are denominated in rETH.
For individual stakers, Rocket Pool nodes require only 16 ETH per validator, which is then added to the staking pool. This is known as a mini pool. The Beacon chains recognize them as regular validators when they are together. Rocket Pool’s smart contracts handle all the withdrawals, rewards, and delegation. This makes them fully decentralized. When you deposit on Rocket Pool, you are instantly given rETH token upon depositing, which is the tokenized version of your staked eth.
Lido is a liquid staking platform that allows users to stake as much Ether as they wish. This feature of liquid staking is very important; when you stake Ether on Lido, you do not lose access to your funds. Unlike some staking options, it does not lock funds. What Lido does is give you staked Eth (stETH), which corresponds to the amount of Ether staked. So 10 Ether will give you 10 stETH.
The cool thing with stETH is that it is a tradable asset. You can trade and use stETH like you would any other token. It should be noted however, that stETH is not pegged to ETH. The value is determined by demand and supply; the more there is demand for stETH, the more the value will accrue. In fact, this theoretically means stETH may even sometimes be more valuable than Eth on the market, depending on market conditions. In the same vein, stETH may trade at a discount to Eth, as is currently the case. This gives arbitrageurs the chance to benefit from the price arbitrage.
So, in summary, stETH is traded outside at a value determined based on demand and supply, but on Lido, you can always get back your stETH for Ether without any price differences affecting your redemption.
This makes sense for ETH holders, who have been reluctant to stake their tokens due to lockup risks. By incentivising them through liquid staking, users will be more than willing to secure the network, especially since stETH usually doesn’t stray too far away from Eth’s value.
Indeed, estimates have shown that Lido holds over 80% market share for Ethereum liquid staking. Rewards distribution Lido is technically run by a DAO (Decentralized Autonomous Organization), so your deposited Ether tokens are actually distributed to reputable node operators who are members of the Lido DAO.
Lido gives out a 3.7% APY, less profitable compared to staking in a centralized exchange like Coinbase or Binance pooled staking. There is also no minimum deposit to join a stake pool, but Lido deducts a 10% stake fee.
Kraken is a crypto exchange that also helps users stake their Ethereum. If you want to run a validator node you will need 32 ETH, but it also allows you to join a staking pool for as low as 0.0001ETH.
Rewards distribution goes from 4% to 7% APY depending on how much you stake.
Go to the “Earn” section at the top of the Kraken webpage, choose the Stake option and select Ethereum.
Kraken charges a 15% administrative fee to stake Ethereum, significantly higher than most pooling options. Also, Kraken currently does not allow users to trade their staked ETH tokens.
Coinbase is one of the most popular exchanges in Africa. It does not require a minimum balance for users to be able to stake Ethereum. Coinbase also runs its nodes directly; it aggregates the tokens pooled from investors to run nodes directly on the Beacon Chain.
On Coinbase, users can earn as much as 3.65% APY on staked Ethereum. However, the exchange also charges a 25% commission for any rewards earned through staking.
Binance is the largest crypto exchange in the world in terms of trading volume. It is also one of the top exchanges for Africans. Users can earn up to 5.20% APY on staking Ethereum on Binance.
Binance offers a variety of interest-earning programs for users. Users can decide to employ the Flexible Savings option to stake their crypto and earn interest, with the option that they can redeem funds at any time. Once a user subscribes, the interest calculation begins on the second day and has returned anywhere from 0.3% to 4.4% APY.
On the other hand, Locked Staking is when funds are locked for a set period to continually support the operation of the Beacon Chain. Unlike savings, Binance doesn’t charge fees to lock Eth tokens.
However, if users choose to lock their tokens for a specified time, and then choose to redeem their staked coins earlier than the lock-up period, they will not earn any interest.
So there it is, all you need to know about the merge. The cool thing is you can take advantage of the opportunities from it, wherever you are in the world. Do your research on the best place to stake your assets and beware that there is a real risk of losing all your Eth in various ways.