Ethereum 2.0 Phase 0 is slated to launch later this year. However, ConsenSys says DeFi might affect ETH staking functionality which will be enabled during Phase 0.
Unarguably, the decentralized finance market provides another investment opportunity for Ethereum investors on a whole new level. Rather than trading or hodling Ether (ETH), investors now lock their cryptocurrencies on high-yield DeFi protocols for massive returns. The rise of these profit-milking opportunities divides the attention on the cryptocurrency market. More and more crypto investors have begun flocking to DeFi.
This resulted in congestion on Ethereum, which is the root network powering the decentralized finance market. The congestion on the network raises the need to accelerate the long-planned Ethereum 2.0, the major upgrade to Ethereum. Eth2 introduces the switch from Proof-of-Work (PoW) to a Proof-of-Stake (PoS) model. As such, holders c anstake their cryptocurrencies (ETH) to help secure the network.
As developers prepare Phase 0 – the development phase with the staking functionality – ConsenSys suggests that DeFi might affect staking.
ConsenSys relays possible threats to Ethereum 2.0
Following a recent publication by ConsenSys, a New York-based blockchain company, Ethereum investors may not actively participate in Eth2 staking. ConsenSys blames the fact that Ethereum investors lose complete control of their cryptocurrencies once it’s staked. Staked coins cannot be withdrawn or touched, at least until the next Phase (s) with the transfer functionality launches. The blockchain company noted that it might require an additional period – up to 12 months – for that Phase to launch.
Judging by this, the blockchain company concludes that the investors might shy away from staking, although it comes with a reward. The company explained:
“It is not unreasonable to worry that ETH holders would (at best) wait to see how early staking returns compare to DeFi returns, or (at worst) decide altogether not to ‘risk’ locking up ETH until Phase 1.5 (which is likely at least a year away) in case another similar bull run occurs in the meantime.”
The Issue of Liquidity for Staked ETH
The decentralized finance market offers Ethereum investors a better profit-making opportunity through yield farming protocols. These yield farming rewards are probably greater than rewards from staking. More so, investors still have control of their locked crypto assetss in DeFi, unlike when they stake it in Ethereum 2.0. This can threaten the staking participation when Phase 0 launches.
As a solution, ConsenSys urges DeFi providers to introduce liquid tokens that bear the actual value of staked ETH. Recently, Blocdesk reported that Lido plans to solve this particular issue of staked ETH illiquidity with a token dubbed bETH. It bears the value of investors’ staked coins. Besides, the token is compatible with the decentralized finance market.
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Source: ConsenSys: How High Yielding DeFi Opportunities can Threaten Ethereum 2.0