Valid Points: Four Keys to Unlocking Ethereum 2.0, Explained

Three weeks into its launch, Ethereum 2.0 is close to tripling its initial deposit threshold of 524,288 ETH. These deposits made in increments of 32 ETH represent the stake of active or soon-to-be active validators on the network. 

In order for Eth 2.0 to progress to its next phase of development, the new, recommended minimum number of validators is 262,144, which multiplied by a stake of 32 ETH would also mean a minimum deposit threshold 8,388,608 ETH. As background, the next phase will initiate the creation of 64 mini-blockchains, also called “shards,” to boost transaction throughput and network scalability. 

Thereafter, in phase 1.5, developers are expected to activate ETH transfers on the network and seamlessly merge all Ethereum users and decentralized applications (dapps) to the new proof-of-stake blockchain. 

There’s much work still to be done on Eth 2.0, but the highly anticipated launch of the network and the onboarding of hundreds of thousands of validators are thought to be the most difficult technical tasks in the entirety of this phased rollout. 

Danny Ryan told CoinDesk in an interview back in late September, “Phase 0 is much more complex than I believe phase 1.5 is. This merger … [phase 0] is essentially a bootstrapping phase where this new consensus mechanism and system is bootstrapped in parallel to the old system.”

As of Tuesday, Dec. 15, Eth 2.0 is 18% closer to successfully completing its bootstrapping phase. There are roughly 33,700 active validators on Eth 2.0, with close to 12,500 additional ones waiting in an activation queue for entry. 

Phase 0 is far from complete. While the first few weeks after launch have been promising, there’s still a long way to go before we can all breathe a sigh of relief at getting past the most difficult phase of the network’s live development unscathed.

It’s important to remember not all Eth 2.0 staking options are equal.

Staking services come in two flavors: custodial and noncustodial. In practice that means the validator key is either held by the service provider or it’s created and held by the investor.

“Not your keys, not your coins” is a crypto rallying cry for a reason, and it’s no different with Eth 2.0. Knowing who holds your keys is the same as knowing who controls your funds, and it is the most important part of setting up your validator. 

When you deposit funds in Eth 2.0, you create a total of four keys: a public and private validator key set and a public and private withdrawal key set.

The validator key is your car key. The key “actively signs on-chain (ETH2) operations such as block proposals and attestations,” according to Ethereum Foundation researcher Carl Beekhuizen in beaconcha.in. 

It’s also called the signing key and is always online (unless you stop validating by exiting the network). A malicious party snagging the key could cause you to miss attestations and lead to a variety of penalties.

The withdrawal key is your safe key. It controls the 32 ETH deposited in Eth 2.0 deposit contract plus rewards from validating the network. While the validator key is considered “hot,” the withdrawal can be placed in cold storage for extra protection until deposits open in Phase 1.5. If you lose the withdrawal key, you’ve lost access to all your funds.

Decentralized staking allows the user to determine the future of their deposits. You never surrender control of your keys to anyone else. The trade-off comes in technical risk which falls squarely on your own shoulders. In other words, you need to know what you’re doing, technically speaking. If you deposit to the wrong contract, for example, it’s on you.

Still, you may not have the internet connectivity needed to validate the Beacon Chain or the technical know-how. Luckily, options exist: There are at least 30 providers staking providers including mainstream exchanges like Coinbase or Kraken, according to staking firm Stakefish.

Most centralized exchanges such as Coinbase and Kraken are custodial staking services. That means you deposit the minimum 32 ether to participate and let them set up a validator on your behalf. They also hold your validator key.

Custodial services have their place, but they also carry a different risk profile because of their centralized nature. Validating with a service means you are trusting them not only to run your set up correctly, but also to honor the initial staking agreements down the road.

Although staking with a custodial firm is always alluring, given the ease of use, you necessarily open yourself to a new set of risks.

In fact, a staking service was one of the first validators to be slashed following the launch of the Beacon Chain on Dec. 1. Staking service Ankr had 10 validators slashed for “surround voting,” wherein a validator publishes a “vote within the span of another of its votes,” according to Run Time Verification. The penalty for being slashed, in this case, is not only a forfeiture of a small amount of ETH, but being booted from the validator queue until deposit withdrawals are available in at least a year or more. Ouch!

A general trend worth watching is the network participation rates and penalties compared between custodial and noncustodial node services. While custodial services will likely have more stable setups, those who went through the trouble of personally setting up a device probably share higher enthusiasm for Eth 2.0 as a project, which may translate into better maintenance going forward.

We’ll soon be incorporating data directly from CoinDesk’s own Eth 2.0 validator node in our weekly analysis. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.