Ethereum is one of the most popular cryptocurrencies on the market today, second only to the industry’s flagship coin, Bitcoin. It’s powered by some of the sector’s most cutting-edge technology and is widely regarded as being the future of cryptocurrencies.
If you check out a list of the best cryptocurrency to buy today, Ethereum is certainly going to be there. However, before you decide to invest, it’s important you understand how the cryptocurrency works. In the guide, we explore the idea of Ethereum staking and discuss the standardized Ethereum staking rate. Find out more below.
The Proof-Of-Stake Consensus Mechanism
Transactions made using cryptocurrencies are recorded on blockchain platforms, with each transaction added as a block to form a chain. However, these blocks must first be verified before they become part of the chain.
Blockchain networks are decentralized. They are not controlled by an overseeing body, organisation or individual. What this means is the users of the platform are responsible for verifying new blocks. This verification process is conducted through something called a consensus mechanism.
Bitcoin, the first blockchain platform, uses a consensus mechanism called proof-of-work (POW). New blocks generate hash codes, and users compete to generate a matching code or one of lesser value. To do so, they must solve mathematical equations with their computers, a process that can be incredibly energy-intensive. The user who generates the correct code will validate the block and will be given cryptocurrency as a reward.
Ethereum originally used a POW consensus mechanism but underwent a major update in 2022 called the Ethereum Merge which saw this change to a proof-of-stake (POS) mechanism. Unlike in a POW system, where everyone can take part in block verification, validators in a POS protocol are chosen from a group who have staked a certain amount into the blockchain.
What Benefits Does POS Offer?
The key advantage that POS has over POW is that it is significantly less energy-intensive. The climate crisis is a pressing issue facing the world today, and industries are being urged to do all they can to reduce emissions and become more environmentally friendly.
The computing power required to perform POW processes is enormous. Research has revealed that block validation, otherwise known as mining, for Bitcoin in the US alone uses as much energy as around 3 million households.
POS consumes significantly less energy than POW. This makes it the perfect consensus mechanism as we head towards a greener future and directly addresses the environmental issues and criticisms often levied at cryptocurrencies like Bitcoin.
Standardized Ethereum Staking Rate
If you want to get involved with Ethereum staking, you will need to stake a considerable amount into the blockchain. Users must stake at least 32 ETH to be chosen as a block validator. According to Ethereum’s current price, this means staking over $55,000.
This is a lot of money, but there are benefits. Being chosen as a block validator means you could earn Ethereum as a reward. Furthermore, staked Ethereum now generates interest.
The interest rate for staked Ethereum changes depending on the amount of Ethereum that has been staked and how many validators are present on the platform. The interest rate increases as the volume of staked Ethereum grows.
Currently, there are 26.4 million Ethereum staked, and the interest rate is 3.03%. To understand the rate of change, we can look back to August 2021 when the interest rate was 6% with 6.8 million Ethereum staked.
By having a standardized staking rate, Ethereum encourages users to participate in block validation by offering them tangible financial rewards. It has helped generate more interest in the asset and is a key advantage over competitors.
Why is This Important?
You might ask yourself why the standardized Ethereum staking interest rate is such a big deal. We’re used to hearing about interest, whether that’s in the context of a bank or a credit card, so on the surface, the concept doesn’t seem particularly revolutionary.
However, as the first of its kind in the crypto world, the standardized Ethereum staking rate could have far-reaching implications. Cryptocurrencies were conceived as the future of the financial world and were tipped to replace traditional methods of payment and transaction methods. While their use has undoubtedly increased, they have so far failed to achieve true mainstream integration, and instead are still thought of as a secondary form of payment option.
By introducing a standardized rate, Ethereum is becoming more like a traditional financial system. Crucially, it’s doing so without losing touch with the idea of decentralization, which is integral to everything the crypto industry is about. The promise of interest and financial rewards will help encourage more people to get involved with Ethereum. This will build the asset’s image and reputation, which should help see it become further integrated with brands, businesses and industries.
The Ethereum Merge brought about a number of important changes, not least the introduction of a POS consensus mechanism. By implementing a standardized interest rate, Ethereum now offers more benefits for users and will motivate more people to get involved and start validating blocks on the network. We could see more cryptocurrencies move to a POS system and start offering their own standardized interest rates.