“The solution is to ban proof of work. Proof of stake has a significantly lower energy profile.” — Erik Thedéen, vice chair of the European Securities and Markets Authority
The mechanism of staking, or proof-of-stake, was first introduced in 2012 by Sunny King and Scott Nadal. The original intention was to solve the Bitcoin blockchain’s dilemma concerning unsustainable energy consumption. The initial system chose nodes based on the number of coins staked in an individual’s wallet. Therefore, individuals with larger coins staked had greater chances of being selected to add a block to the blockchain and earning profits from their rewards.
PoS intends to avert skyrocketing energy costs and the hash rate complexity that comes with mining, and much of the same principles of staking still apply today. The Peercoin blockchain, introduced in 2012 by King, was the first functioning implementation of PoS while still keeping PoW. It also addressed early PoS issues such as distribution, monopolization and security. Other blockchains soon followed suit — Blackcoin, Nxt, Cardano, Algorand and Ethereum — in using the PoS mechanism. There are now over 200 PoS-based cryptocurrencies and counting.
Perhaps the most notable update regarding PoS in 2022 is the Merge, which successfully merged Ethereum’s mainnet execution layer with its previously separate consensus layer, the Beacon Chain. This marked the second-largest cryptocurrency’s official shift to PoS from PoW, officially rendering Ethereum mining obsolete. The Merge lowered the network’s energy consumption by 99.95% and reduced its hash rate to 0.00.
Since staking requires tokenholders to lock up their assets on a protocol, rendering them illiquid, newer staking models have since cropped up, offering better liquidity in the form of staked tokens (for example, stETH for staked Ether, stSOL for staked Solana). Liquid staking solutions also grew in popularity, as well as other projects that allow “restaking” or provide validator technology in hopes of propping up security and overall decentralization.
Ethereum’s shift to PoS continues to draw increasing institutional interest in ETH staking entering 2023, with investors finding the prospect of yields from staking attractive. Current staked ETH has already surpassed 16 million, placing the total amount at roughly $25 billion. The most pressing issue about Ether staking in 2023 seems to be ETH withdrawals. Before the Merge, validators staked 32 ETH on the Beacon Chain to participate in block validation. They agreed that they could only withdraw their rewards and locked-up assets until the next batch of upgrades on the PoS network.
The upgrade, called Shanghai, is slated to roll out sometime in March 2023. It will inject the EIP-4895 code into the network, allowing the Beacon Chain to process staked ETH withdrawals. Meanwhile, staking projects continue to gain traction, riding the increasing popularity of yield farming and liquidity staking.
