How it Works: Ethereum Staking

How it Works: Ethereum Staking

November 22, 2023

The evolution of Ethereum has reached a significant turning point with the introduction of Ethereum 2.0, marking a monumental upgrade from its predecessor and changing the climate of Ether (ETH) staking. Ethereum 2.0 shifted the network model from proof-of-work (PoW) to proof-of-stake (PoS), intending to improve the network’s scalability, security, accessibility and more. The PoS consensus also transformed the role and responsibilities of validators within the Ethereum network. 

Ethereum 2.0’s PoS consensus has opened the doors for Hex Trust to provide its institutional-grade infrastructure for institutional clients seeking to engage in ETH staking, as Hex Trust functions as an Ethereum Validator and node operator. While our services facilitate a streamlined approach to staking for clients, the intricacies of staking at a protocol level are nevertheless complex. Validators play a pivotal role in staking, ensuring the security and integrity of the network while actively participating in the transaction validation process. 

An Overview of the Validator Lifecycle

Setting up a Validator Node

To participate in ETH staking as a validator, one must set up a validator node. The process of setting up a node can be challenging and requires deep knowledge and understanding of the Ethereum network. Hex Trust provides a seamless solution by simplifying the setup of a validator node by handling the technical complexities on behalf of our institutional clients. Clients leveraging our ETH staking services allows them to focus on the staking essentials without worrying about the intricacies of node setup and maintenance. Staking is highly secured via Hex Trust’s custody-grade protection for the security of validator keys, as well as the utilisation of air-gapped wallets for devices not connected to the internet. 

  1. Placing ETH

The actual first step in the validator lifecycle is the placement of ETH. A minimum of 32 ETH must be placed into a staking smart contract essentially to incentivise commitment to the rules of the protocol. The validator nodes' information is then technically verified before the lifecycle can proceed. This stage typically lasts a few hours as the deposit and validator verification is processed.

  1. Validation queue 

After the Placement phase, the validator enters a pending state and is placed in a queue to manage the activation of validators in a fair and orderly manner. This queue helps to manage the scalability of the network and can prevent an excessive influx of validators which could potentially overwhelm the system. Pending validators in the queue could be active after around 25 minutes if the queue is empty. However, during times of high demand or network congestion, the queue may become longer, resulting in longer activation times for new validators. 

  1. Active State 

Once validators are activated, they begin to carry out their duties of enforcing protocol rules and advancing the network state in return for rewards. Validators in the active stage take turns proposing and producing blocks in the Ethereum blockchain that include valid transactions. Validators also review and verify transactions included in blocks proposed by other validators. In addition to these, validators engage in attestation, which involves voting on the current state of the Ethereum blockchain. Validators in the active stage must consistently maintain their online presence and meet the network's requirements, as failing to do so can result in penalties. Validators will stay in the active stage unless they decide to voluntarily exit or get slashed.

Hex Trust prioritizes top-level availability and security with dedicated nodes to avoid potential penalties and risks, 24/7 node monitoring to ensure optimal functioning, consistent connectivity to the protocol, and reliable data access for all nodes. 

  1. Exiting

When a validator decides to withdraw voluntarily from the active stage, it must continue to attest and propose as it did while active, except while moving through an exit queue, similar to the validation queue. The time spent in the exiting stage depends on the number of validators ahead in the queue.

  1. Exited 

Once the waiting period ends, the validator transitions into its exited state and is no longer involved with the Ethereum chain. After a delay of a few days, a validator's assets can be successfully withdrawn from the network. 

Validator Rewards

Rewards are allocated to Ethereum validators for their participation in proposing and validating new blocks, essentially for ensuring the continuous operation of the Ethereum blockchain in adherence to its intrinsic framework rules. The rewards earned by validators depend on their performance in maintaining the network, with the exact mechanism for calculating rewards involving a complex set of formulas and variables. The primary factors involved in reward determination are the total amount of ETH being staked, the validator’s stake in proportion to the total stake, and the validator's overall network performance. Validators with higher stakes receive a significantly higher share of the rewards. 

At Hex Trust, each ETH staking client has their own validator(s) set up specifically for them. Subsequently, validator rewards are sent to clients’ Hex Safe wallet on a preset schedule (monthly, quarterly, etc.).

Hex Trust’s client withdrawal wallets have institutional-grade protection via Hex Safe, ensuring rewards have industry-leading security. 

Hex Trust is an Ethereum Validator and node operator and provides ETH staking services for its institutional clients. Please reach out to our team for more information at sales@hextrust.com.

Disclaimer‍
This material is not directed to or construed as solicitation or advertising to any person in any jurisdiction where (by reason of that person's nationality, residence or otherwise) the publication or availability of this material is prohibited by any law. This material is not intended for any use that would be contrary to local law or regulation. Products or services mentioned on this material are subject to legal and regulatory requirements in applicable jurisdictions and may not be available in all jurisdictions. Without limiting the generality of the foregoing, HTM and its associated entities are not licensed with the Hong Kong Securities and Futures Commission or any other regulatory authority in Hong Kong. Accordingly, persons are required to inform themselves of and observe such laws which are in force in their jurisdictions. 

Nothing in this material is intended as a recommendation or an offer or solicitation for the purchase of any digital asset, security or financial instrument, to enter into a transaction involving any digital asset, security, financial instrument or trading strategy, or as an official confirmation or valuation of any transaction mentioned in these materials. We make no commitment to transact at any particular price or at all, now, or in the future. These materials are informational only and do not bind us or any other entity or person in any way. You should not construe the content of any material provided as accounting, financial, legal, tax or other advice, and you should consult your own attorney, financial advisor, tax advisor, accountant or other advisor as to legal, financial, tax, accounting and other matters.

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