The Ethereum 2.0 network has now reached $9 billion in staked assets. By all metrics possible, the Proof of Stake blockchain has surpassed everyone’s expectations. Not only did it successfully launch in December, but it is also on the road to receiving new upgrades that will help PoS ETH replace Proof of Work ETH.

Staking is a well-known consensus model, but for many reasons, it was not implemented in the blockchain industry. While some issues stem from a technical nature, others are deemed to start with fear.

Staking involves literally placing your assets at stake in hopes of receiving rewards. Since your assets are on the line, any sort of malicious behavior will result in losses. Be it intentional or unintentional, a blockchain like Ethereum 2.0 will punish users who either spam transactions or go offline. Considering that one must provide at least 32 ETH (worth $80k at the time of writing), the losses will certainly not be small.

So what are the risks, and how does one even start with protecting himself when staking? We will answer both of these questions and more in the following sections.

How difficult is it to host an Ethereum 2.0 node?

Blockchain technology is often criticized for being too complicated. While that view is subjective, we can say with certainty that it is true when it comes to hosting a node.

Hosting a node on the Ethereum 2.0 network is no easy task. Users who personally host such nodes without relying on 3rd-party services require a lot of technical knowledge in order to not get burned. Mistakes can occur here and then, but the moment that one loses 50% of their deposited 32 ETH, the blockchain will force you out and remove the node.

In comparison to hosting a node, trading and investing in cryptocurrencies is relatively easy. So if you struggle with understanding how to use an exchange or use more advanced trading systems like futures markets, it may be wise to reconsider staking. After all, the world of smart contracts is incredibly complex, and it takes real commitment and background knowledge to even begin understanding how Ethereum works.

How does slashing occur?

Slashing is the concept of penalizing a node operator for behaving maliciously or not processing tasks as he should be. If Ethereum decides to slash a node’s assets, the user will have to bear his mistakes.

Again, it is worth repeating that slashing is not a moral action. It does not matter whether you have intentionally made a mistake or whether external circumstances have forced you to act inappropriately. For instance, a heavy storm may cause you to lose your internet connection which pauses your node. If your node infrastructure stops working, Ethereum will slash your rewards.

Since no one can predict whether such events will happen or not, certain node operators decide to pay for hosting provider services offered by 3rd-party entities. The uptime of a node is hence guaranteed, and there is no possible way to lose money through slashing. However, not even this course of action can guarantee safety as even large hosting providers tend to experience downtimes from time to time.

Other risks

Aside from offline nodes, there are important security risks to be considered as well.

For example, every node operator has a set of validator keys which he must keep secure. If they are lost or forgotten, the operator loses access to all of his assets. If these keys are stored on a device, they can be lost in the event of physical damage as well.

This is much worse than going temporarily offline. In this case, the network will not be reluctant to permanently slash your stake and completely destroy your node-hosting journey.

Another way of losing money just by not keeping your validators key safe is by having another individual gain access to it. IF a hacker somehow steals your keys by gaining access to your computer, he can unstake your assets or even decide to attack the network by spamming fake transactions.

Is it possible to remove all risks?

Node operators are sadly exposed to risk at all times. There is simply no way to go around it. However, the risk is only there if you are unwilling to back away from personally hosting a node.

In the days of PoW, miners joined pools in order to gain a greater chance at earning block rewards and earning more coins. Today, stakers are similarly pooling their assets together in order to fare better on the blockchain.

Ethereum 2.0 staking pools are excellent alternatives for those who do not wish to expose themselves to the standard staking risks. These pools enable users to stake virtually any amount of ETH by joining forces with other community members. Moreover, the process is completely automated and requires no interaction from the user.

We can best describe the efficiency of staking pools by using the best possible example: Rocket Pool.

Rocket Pool is a staking platform for the Ethereum 2.0 blockchain that enables investors to stake without having to personally host a node. To do so, the project employs three major features which are necessary to make 3rd-party staking possible.

Socialized risk is a concept which shares slashing risk among all stakers. Usually, a staker would lose a significant portion of ETH if he were to be slashed. However, socialized risk enables everyone to take the burden of an individual’s mistake. Since the loss is absorbed by numerous users, the loss is negligible.

By using smart contracts, Rocket Pool ensures that its activities are not only decentralized but public as well. Staking requires trust, and for someone to deposit their ETH on Rocket Pool instead of Ethereum, they need to be sure that the platform is not malicious. On that account, smart contracts make it possible for users to trust Rocket Pool and not lose sleep.

Tokenized staking is what makes Rocket Pool the best option for staking. Usually, staking on Ethereum 2.0 means that your assets are locked up for a certain period of time. During this time period, the staker cannot do anything with his locked ETH.

Market-wise, this is a risk category of its own - which is why Rocket Pool tokenizes staking. After depositing ETH to a Rocket Pool contract, the user receives rETH in return. This is a tokenized asset that represents the user’s stake and yield. Since rETH has the same characteristics as any other ERC20 token, it can be secured in cold storage, used in other DeFi products, or even be sold on the market.

All-in-all, staking pools seem to be the wiser choice. Apart from reducing risk, they also automate the staking process and let you have more time to spend on other crypto activities. Why stress your mind away by staking if you can let a smart contract do it instead of you?

Conclusion

Hosting a node on your own is more than risky. It takes technical knowledge, and even experienced node operators can, through sheer ‘luck,’ make a mistake and experience the infamous slashing process. Since Ethereum enforces a strict 32ETH staking rule, it is more than advisable to think twice before venturing into the staking business.

So what can you do? Stakers are forced to do two things: pay for an external hosting service or join staking pools.

Both are safe options. However, it is obvious that staking pools offer a plethora of features that cannot be found anywhere else. Plus, staking is completely automated, and apart from depositing Ether to a smart contract, there is really nothing else that you need to do when using a platform like Rocket Pool.

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