The ongoing upgrade from Ethereum 1.0 to Ethereum 2.0 will introduce many changes. As is often the case following such an upgrade, there may be some downsides to consider. How much of a factor these potential concerns prove to be, is difficult to predict.
An Unclear Ethereum 2.0 Timeline
As documented before, the Ethereum 2.0 rollout will occur through multiple stages. The network is currently in Phase 0 and aims to transition to Phase 1.0 in a few months. Eventually, the goal is to achieve Phase 1.5, which is when proof-of-stake will replace proof-of-work, among other things. All of these tweaks and upgrades will make the Ethereum ecosystem far more robust than it is today.
The big downside to this multi-Phase approach is the lack of any timeline. More specifically, it can take months, or even years, to fully complete the switch to Ethereum 2.0. With this uncertainty on the table, staking Ethereum also becomes a bit less appealing. Whoever contributes funds to staking won’t be able to access it until Phase 1.5 launches. If that process takes over a year, a lot of enthusiasts may lose faith in Ethereum altogether.
One also has to keep in mind developers delayed the activation of Phase 0 multiple times. It is not unlikely the other phases will see similar delays. If so, it will be a huge problem for the Ethereum ecosystem. Initially, Phase 0 would go live in Q1 of 2020. Its activation took place in early December of 2020. Judging by that delay, it is possible Phase 1.5 will not hit the main network until mid-2022.
Competitors Won’t Sit Still
It is understandable why the phased rollout for Ethereum 2.0 will take a lot of time. Several aspects of Phase 1 and Phase 1.5 are still under development at the time of writing. As such, it is impossible to provide any hard deadline for completing changes. At the same time, this creates an exciting opportunity for the so-called “Ethereum killers”.
More specifically, there are many blockchain networks capable of rivaling or even surpassing Ethereum. All of those projects now have at least half a year to step up their game. Ethereum isn’t the only blockchain with DApps, smart contracts, and DeFi solutions. Dethroning this ecosystem is a daunting task, but nothing is impossible.
Miners Need to Adapt
The significant change coming to Ethereum is moving from proof-of-work to proof-of-stake. Through proof-of-work, miners are tasked with securing the network. In exchange for doing so, they receive block rewards of multiple ETH every 20 seconds. Once proof-of-stake takes over, miners will no longer play an active role in the ecosystem.
At that time, the miners either need to switch to a different chain or find other ways to contribute. There is also a chance of miners bailing on Ethereum 2.0 before the switch to proof-of-stake is complete. This latter scenario is a very problematic one, as it can temporarily disrupt the entire network. Again, this seems like an unlikely scenario, but no one can dismiss the possibility that easily.
Price Fluctuations Will Remain
Assuming all of the above occurs without a hitch, there is still a significant drawback to consider. Those who stake Ethereum – or plan to in the future – need to be aware of ETH price fluctuations. As these users need to lock up funds for an undetermined time, Ethereum may collapse in value by the time Phase 1.5 comes around.
Currently valued at over $550, it is impossible to determine the future price of ETH. A lot can happen over several months, if not a year or longer. Cryptocurrencies are incredibly volatile assets first and foremost. Even if a larger portion of the circulating ETH supply is locked in staking, there will still be plenty of liquidity across exchanges to affect the price.
Uncertain Ethereum 2.0 Staking Returns
Speaking of staking for Ethereum 2.0, there are other factors to take into account. Contrary to what most may assume, there is a flexible reward schedule for staking Ether. Returns will depend on how much ETH is staked on the network as a whole. As this number rises, the potential returns will decrease. Currently, users will earn anywhere from 1.56% to over 15% annually.
Dealing with this uncertainty will not be easy. Combined with the potential price fluctuations, staking Ether can yield negative returns in the worst-case scenario. Although users will have more ETH at the end, the monetary value of this Ether balance may look very different.
Another part of the staking aspect to keep in mind is whether earnings are taxable. Cryptocurrency users often tend to overlook the role of taxation and its impact on profits. Depending on one’s region, this tax rate may prove rather significant. It is something to keep in mind for those who want to explore Ethereum 2.0 staking.