The much-publicised Ethereum Merge has finally happened. Among the many changes one can expect, small investors can make profits by staking Ethereum at centralised crypto exchanges.
The Ethereum ‘Merge’ has finally happened as scheduled on September 15, 2022, according to the Google countdown. The Ethereum network has finally got the much-awaited Merge with the proof-of-stake network, and has finally shifted to a much faster and more energy-efficient mechanism. At present, on the proof-of-work network stage, Ethereum uses 83.89 TWh of energy per year, according to Digiconomist. This energy usage is set to be reduced by almost 99.9 per cent after ‘The Merge’.
Ethereum will implement a ‘proof-of-stake’ method, each time a new block is to be added, which will happen every 12 seconds or so after the Merge. An algorithmic lottery system will choose who will get to verify transactions (and gain tokens as a payment for doing so) from a pool of stakers who will temporarily deposit their tokens to safeguard the network.
“This staked Ether will act as a collateral that can get slashed if the validator behaves dishonestly. The validator will be responsible for storing data, processing transactions, and adding new blocks to the Blockchain. This will keep Ethereum secure and earn validators new ETH in the process,” says Rajagopal Menon, vice president, WazirX, a cryptocurrency exchange.
At present, it takes about 13-14 seconds to mine one Ethereum block. But after the switch to a proof-of-stake system, the validation time for one block will be reduced to 12 seconds, which will be negligible for the user to notice, but will still be faster.
“There is likely to be a limited increase in Ethereum’s transaction speed as the software upgrade will change its mechanism to perform (proof-of-stake from proof-of-work), and not the speed. However, the Merge is expected to mildly increase its speed,” says Dileep Seinberg, founder & CEO, MuffinPay, a bill payment and utility crypto.
After the Merge, the Ethereum network will divide the data blocks into smaller blocks, allowing for more transactions at a faster rate. So, it will be able to accommodate more transactions in a single block, making it faster and easier to use.
If the number of people using Ethereum increases, the transaction charges might also drop as a result.
“Despite this marginal improvement, Ethereum will lack behind its biggest rival Blockchains, such as Solana and Avalanche, which are far ahead in terms of transaction speed. However, Ethereum foundation has clarified that it will improve the speed and gas fees in the future updates, but has not given any clear timeline,” Seinberg adds.
To become a validator on the Ethereum network, you will need at least 32 ETH, but centralised exchanges offer staking to those customers who have less than 32 ETH. Thus, the proof-of-stake reward system will now be available to a larger pool of investors, as you can stake your tokens at most of the centralised exchanges.
The crypto exchanges will then provide you with an annual yield percentage (APY) based on a lock-in period, and various exchanges will offer different amounts of reward percentage.
“Staking Annual Percentage Returns (APR) is estimated to be roughly 7 per cent after the Merge. The increase in Staking returns after the Merge is due to the reallocation of transaction fees that will go to proof of stake validators instead of miners. Transaction fees are directly proportional to the number of users of the Blockchain. If the Merge is a success, and the number of users of the ETH Blockchain increase, we could see a rise in staking returns for exchanges and validators,” says Avinash Shekhar, CEO at ZebPay, a crypto exchange.
However, investors should be wary of exchanges that are offering high staking rewards; there is a risk factor associated with the staking reward system, as Hodlnaut, a Singapore-based crypto exchange suspended withdrawals after declaring bankruptcy last month; they were promising returns as high as 12 per cent on some tokens.
So, one should always stake one’s token in a well-established exchange and always check how much percentage of the funds are insured.