With the upcoming update to Ethereum 2.0, the Ethereum blockchain will change to a proof-of-stake consensus mechanism. Ether will not be mined anymore. Instead, users get the chance to stake their Ether to validate transactions and earn interest on the staked Ether. Users get the chance to participate in this through an Ethereum staking pool, but that doesn’t come without problems. This article explains what an Ethereum staking pool is and what challenges decentralised staking pools face.
What is an Ethereum staking pool?
To stake with Ethereum 2.0, you need to run a node that validates transactions. However, 32 Ether is needed to run a node and be eligible to stake, which is worth over US$80,000 as of August 2021. Clearly, not everyone can afford to run a node at such cost. This is where an Ethereum staking pool comes in. It enables Ethereum holders that do not meet the minimum threshold of coins to stake their assets in the pool, which, in turn, runs nodes and stakes them with the network directly.
What is the problem of an Ethereum staking pool?
These staking pools are often centralised. In fact, statistics show that almost one third of the money in Ethereum staking services belongs to centralised exchanges like Binance, Kraken, and Coinbase. Another significant portion of the money goes to centralised staking services like Staked. The problem is that Ethereum aims to be a decentralised blockchain, but that is being undermined by centralised exchanges running nodes and acting as a proxy for those that cannot afford the 32 ETH minimum stake. Ethereum 2.0 is looking for a way to prevent excessive centralisation and this is where decentralised staking pools come in.
What are decentralised staking pools and how can they solve the Ethereum staking pool problem?
A decentralised staking pool would allow users to stake their Ether in a permissionless way without giving up custody of them. Lido is a provider of a decentralised staking pool, struggling with overcoming the challenges of decentralising such a pool. Since Ethereum 2.0 isn’t designed to accept permissionless staking, the easiest way is to trust a custodian with your stake. Decentralised staking pools are working on this custodian being a smart contract that lets users deposit, withdraw, and (un)stake from the pool in a permissionless way. If smart contracts can be implemented as node operators, users would not have to rely anymore on exchanges behaving honestly but have full control of their staked Ether. In addition, a bigger share of nodes would be controlled by individual users by proxy of smart contracts. Ethereum 2.0 stakers below the minimum threshold would be less dependent on staking pools and the blockchain would decentralise further.
Conclusion
As of today, implementing smart contracts as node operators is technically challenging and requires work from Ethereum 2.0 developers and decentralised staking pool developers alike. Providers like Lido, currently operating 9.6% of all staked Ether, remain optimistic about overcoming these challenges. A fully non-custodial solution would benefit the health of the Ethereum ecosystem and be a more secure solution for users.