Ethereum’s recent transition to Proof-of-Stake (PoS) has made serious waves in the world of security. One of the biggest changes to the ecosystem and the most relevant to the recent 51% hacks is the economic disincentive introduced against 51% attacks. In this first article, we’ll look at how the billions of dollars worth ETH staked to Beacon Chain strengthens Ethereum’s security. It will further explore the risks and rewards of staking, as well as the regulatory factors investors should consider. At KnowingCoin.com, we help you understand crypto so you can invest with confidence. For any investor, learning about Ethereum’s new security model is a must.

The Staked ETH Shield

High Cost of Attack

In the Proof-of-Work (PoW) days, a 51% attack meant gaining control over more than half of the network’s hash rate. This was an extremely resource-intensive effort, requiring large up-front investments in mining hardware and electricity. The move to PoS has greatly upped the ante. Now, an attacker must acquire and stake a majority of the ETH in circulation to gain control of the network.

Financial Implications

At today’s participation rates, an attacker needs to purchase and stake more than $91 billion worth of ETH. This is the minimum needed to mount a ~50% offense. That is billion — an unbelievable new figure that will prove to be a truly daunting economic wall. At least in part, the immense cost renders such an attack economically impossible for almost all would-be malefactors. This greatly enhances the security of the Ethereum network relative to its PoW forbearer.

The Cost of Mining Hardware

Even prior to the transition to PoS, launching a 51% attack on Ethereum’s PoW chain was cost prohibitive. The investment needed in advanced mining hardware, like ASIC miners, can be significant. For instance, a single WhatsMiner M63S has a wholesale price of well over $10,000. To achieve 51% control over Ethereum’s hashrate, you would need to spend literally billions of dollars on these machines. That’s an astounding financial pledge! Both of these, in addition to the energy costs associated with such an attack, made a sustained attack economically impossible.

Staking: Risks and Rewards

Staking Rewards

Staking ETH is an attractive option for investors looking to earn rewards while contributing to the security and efficiency of the network’s consensus mechanism and validating transactions. Locking up ETH creates a perverse and powerful incentive. It reduces the circulating supply and makes the network more secure. Now, investors can be rewarded through receiving ETH itself. This creates a huge incentive for them to get involved in securing the network in any way, shape or form.

Annual Percentage Yield (APY)

The ETH that you stake with us will have an APY associated with it. This allows them to generate high yields on their investment, while allowing their assets to remain liquid. Remember that the APY is subject to change depending on network conditions and your chosen staking provider. Yet, it offers significant return for the Ethereum defenders which have secured the chain thus far. Staking ETH can potentially increase an investor's holdings over time, contributing to the network's functionality.

Slashing and Counterparty Risk

Staking provides the opportunity for rewards, but they bring risk. In PoS, validators can be “slashed” or penalized for disobeying protocol rules, leading to a loss of ETH. This alternative “slashing” mechanism goes a long way towards making sure that validators can’t cheat and need to protect the network’s best interests at all times. When you delegate ETH to another entity for staking, you incur additional risks. That same third entity may not live up to its commitments or duties. This is called counterparty risk, and it’s important to thoroughly vet your staking provider to ensure they are reputable, responsible, and reliable.

Choosing a Staking Provider

In order to minimize risk and maximize potential rewards, there are a number of factors individuals should consider when selecting a staking provider.

  • Uptime: Look for validators maintaining uptimes close to 100% to ensure minimal downtime and maximum staking rewards.
  • Track Record: Evaluate the provider's existing track record, including any history of slashing for soft or hard faults.
  • Experience: Consider the provider's experience in operating validators, including the number of validators they operate and the length of time since staking operations commenced.
  • Certifications: Look for certifications such as SOC 2 or ISO, which provide assurance regarding the implementation of effective controls.
  • Communication: Evaluate the provider's website and communication channels to gauge their seriousness and expertise in the field.

Regulatory Considerations

SEC's Staking Statement

The SEC’s Staking Statement is helpful in dispelling custodial arrangements. Having declared they are not investment contracts under Howey, this guidance can go a long way towards addressing regulatory roadblocks for funds seeking to stake Ethereum or other proof-of-stake assets. This has favorable ramifications for large, institutional investors seeking to engage in Ethereum staking. Earlier this year, the SEC’s Division of Corporation Finance reassured that certain staking activities are exempt from registering with the financial regulator. This involves self-staking, delegated staking, custodial, and non-custodial delegation.

Guidance on Service Provider roles

To be exempt from registration, a Service Provider must not "guarantee or otherwise set or fix the amount of the rewards" owed to the owners of the staked assets, and their role must be "merely administrative or ministerial in nature." This guidance demonstrates which types of staking services are most likely to attract regulatory attention, bringing much-needed clarity.

Regulatory uncertainty

Though the SEC has offered some guidance, regulatory uncertainty remains. Industry participants have to thread a very fine needle between all of these requirements, potentially leading to a misallocation of Ethereum staking’s security profile. It’s important for all investors to be aware of the rapidly changing regulatory environment and to obtain the advice of competent professionals when appropriate.

At KnowingCoin.com, we’re passionate about helping you know the security and regulatory Ethereum staking risks. This kind of knowledge is absolutely essential for making smarter, more strategic investment decisions. The massive amount of staked ETH represents a significant economic barrier to attack, enhancing the network's security and stability, but risks and regulatory uncertainties must be considered. By being informed and selecting trustworthy staking providers, investors can help protect themselves and participate in the Ethereum ecosystem with confidence.