How Much Do Ethereum 2.0 Validators Earn?

Key Facts:

  • The more validators that join the network, the more each validator’s reward decreases.

  • The first to join Ethereum 2.0 as stakers get higher returns.

From the merge, miners will stop creating new blocks in Ethereum, and validator nodes will play their role. This means that rewards for working with network operations and security will also change hands.

Analyst firm CoinMetrics submitted a report detailing the projected gains for validators of the new version of Ethereum, as well as other important aspects related to the merger.

The document explains that one of the factors that has the greatest impact on validator returns is precisely the number of validators in the network. At the time of writing, Etherdeum 2.0 has over 418,000 validators with over 13 million ETH in deposits, which gives them an APR (average annual rate of return) of around 4.5%.

So if a validator deposits 32 ether (ETH) into the Ethereum 2.0 staking smart contract under current conditions, they will receive about 1.5 ETH per year. According to the CriptoNoticias Price Index, this amount is equivalent to $2,398 in exchange for an initial investment of approximately $51,000.

However, as shown in the graph below, as more validators are added, the reward is diluted. If at some point Ethereum 2.0 reaches 1 million validators, they will each be rewarded with less than 1 ETH per year.

Graph showing that as the number of active validators increases, the amount of rewards a validator will receive decreases

This is how Ethereum 2.0 validator rewards will evolve. Source: CoinMetrics.

For the same reason, those who previously joined the Beacon Chain as validators (part of the Ethereum 2.0 blockchain active since December 2020) received higher rewards, even in February 2021 the network has At 100,000 validators, the annual rate of return is even higher than 10%.

To the reward for each block, the network commission that users pay when starting a transaction is also added. As with miners today, these fees increase as network congestion increases, at which point operating costs become higher.

Different ways to earn money as a validator

The rewards earned by Ethereum validators are distributed based on each staker’s participation in the creation of new blocks. While a validator will be chosen to verify the transactions contained in the block to be mined, there are others who must certify that the validator will act honestly.

In both cases, rewards are received, although it is clear that the validator responsible for the first task will gain more, since proposing new blocks is more complicated than proving that they are real.

Also, another way to generate income for validators is through priority tipping. These are voluntary incentives that have existed before for miners based on paying extra to make transactions faster. These tricks can greatly improve validator performance when the network is highly congested.

Historical graph of the number of active Ethereum 2.0 validators from 2021 to August 2022

Ethereum validators have been increasing steadily since December 2020. Source: beaconcha.in.

Finally, the remaining alternative to generating profits as an Ethereum validator is through MEV (Maximum Extractable Value). MEV includes prioritizing transactions included in a block to include certain users’ transactions first. This is a practice that has grown with the development of decentralized finance (DeFi) protocols and decentralized exchanges (DEX).

The CoinMetrics report explains that over the past two years, miners have earned $240 million through MEV. At the end of this note, Ultrasound estimates that validators will earn 0.3 ETH per year through this method.

Clarification of Validator Earnings in Ethereum 2.0

Given all the above, it should be clarified that for validators participating in staking pools, the reward will depend on the amount they deposit and the conditions established by the service provider.

Also, it’s worth mentioning that those who deposit ETH into validators will not be able to withdraw their funds (or their profits) until they merge. In fact, validator fund withdrawals are not yet included in the smart contract code and will be evaluated later when the network is running and secure.

Ultimately, you also have to be aware that validators can lose their investment due to various circumstances. As explained in CriptoNoticias, this “punishment” can result from fraudulent behavior (attempting to verify fake transactions or attacking network security) or long periods of inactivity. The amount of the penalty varies depending on the error the validator makes.

Source of information: Compiled from CRIPTONOTICIAS by 0x information.The copyright belongs to the author Fernando Clementín and may not be reproduced without permission

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