Crypto-savvy individuals will be excited to hear about the Ethereum 2.0 network, which utilizes a more energy efficient proof-of-stake mechanism and creates new opportunities for investors to earn crypto! Let’s take a closer look at what makes this network so revolutionary, what exactly this means for the crypto community, and how you may be able to earn cryptocurrency with the 2.0 network.
What is Proof of Stake?
Because Ethereum 2.0 uses a proof-of-stake mechanism instead of a proof-of-work mechanism, it’s considered more energy efficient. But what exactly is the difference between these two mechanisms?
Proof-of-work and proof-of-stake are the ways that cryptocurrency networks confirm transactions. Proof-of-work was first used by Bitcoin and involves mining, which is when miners use computers to compete to solve math puzzles, verify transactions, and are then rewarded for verifying those transactions with more cryptocurrency. Because these computers are constantly working to solve these puzzles, or “mine,” they require loads of electricity and processing power. In fact, it’s estimated that the power necessary to mine 1 Bitcoin is equivalent to powering an average household in the US for 53 days. In other words, just one Bitcoin transaction can raise your electric bill by over $200. Multiply that by hundreds or thousands of times and it can use up a significant amount of power. Elon Musk has even denounced Bitcoin and other proof-of-work cryptocurrencies because of their power usage and fossil fuel consumption.
However, proof-of-work is still attractive for miners since mining for a valuable cryptocurrency will then further strengthen the network. It can become problematic as the network grows, however, and more transactions need to be verified.
Proof-of-stake (sometimes abbreviated as “PoS”) was developed as an alternative to the proof-of-work process. Rather than “mining,” participants (or “validators”) can “stake.” Validators stake cryptocurrency that they already own for the opportunity to be the one to verify new transactions and update the blockchain, therefore earning a reward (which are the transaction fees on the transactions that they’ve just validated). Those who have the most crypto staked and who have had it for the longest will be more likely to be chosen as validators, providing incentives for validators to be more invested. If validators verify an incorrect transaction, they can lose some of their stake. If you don’t have enough cryptocurrency to become a validator (it often requires a large amount – for example, 32 ETH, or $99,630 as of this writing), you can join a “staking pool,” where someone else serves as the official validator, but you earn rewards for the crypto that you stake in the pool. This is otherwise known as delegating.
Staking consumes much less energy than mining, making it a more energy efficient mechanism choice.
How Much Can Staking Earn?
It is currently thought that validators are earning approximately $9 billion from staking, and this number is thought to increase to $20 billion as the network grows over the next year. By 2025, projected earnings are expected to be $40 billion.
The yield from staking cryptocurrency currently ranges from 3% all the way to 13%, depending on the type of crypto.
How can I Stake Crypto?
There are two ways to earn crypto from staking – either by being a validator or through delegation. Becoming a validator is a bit more complicated, as it requires some technical knowledge. Delegation is easier, however, and is normally done through a service such as CoinBase or Staked. You still own your cryptocurrency, but a validator will manage the staking pool that your crypto is included in, in exchange for a small commission of any earnings. Delegation can be a great way to earn more crypto through passive income!
How Can I Become a Validator?
If you want to be more involved than just earning crypto through delegation, you can research on becoming a validator. The following articles gives steps and guidance for the Validating process:
Staking and Tax
The world of cryptocurrency is still very new, so it’s no surprise that there’s lots of questions about if – and how – the government would tax it. Staking crypto is even newer than mining, and because these two methods differ significantly, it’s not quite clear how earnings from staking should be taxed. The UK treats it similar to earnings from mining, but the US hasn’t agreed on if it should be taxed yet. One argument is that rewards from staking should be considered property, and shouldn’t be taxed until they are sold or traded. However, others say that earnings should be taxed when they’re generated, as they already have an established value at that point (which is similar to how earnings from mining are currently taxed). Because of this confusion, it’s best to go to a tax advisor who’s experienced with cryptocurrency and seek their opinion.
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