Becoming a node operator to safeguard the Ethereum protocol requires reliable and top-quality infrastructure. For some individuals, achieving this at home is possible, which EthStaker generally recommends as the gold standard to foster decentralization. However, for many others, it's simply not feasible due to their environment or the services available at their residence. In such cases, utilizing a hosted service like those offered by OVHcloud can be a solution.
Observing or Securing
There are a few types of nodes you can run on Ethereum. A regular node is typically built with a machine that will execute an execution client and a consensus client. It can be used to observe and interact with the Ethereum network. A staking node, on the other hand, includes everything a regular node does, plus a validator client and one or more validator signing keys to perform the regular duties expected of a validator. The primary purpose of a validator is to secure the Ethereum network, and a compensation is provided for correctly and timely executing its tasks. A regular node can easily be converted into a staking node, and vice versa, since the validator client component often has a relatively small resource usage when the number of validators is small. A single machine is capable of running thousands of validators, but proper risk management is necessary when operating a large number of validators.
Being a staker comes with additional responsibilities. A well-functioning validator is expected to perform its regular duties round-the-clock. Validator tasks include attesting to the current state of the blockchain every 6.4 minutes and constructing or selecting a block when randomly chosen as the proposer for a slot. Failure to perform these duties will result in penalties accruing, which are applied to the initial stake supplied by the operator. Reliable infrastructure will assist in executing these duties correctly and promptly.
Reliable Infrastructure
What exactly constitutes reliable infrastructure? While many elements contribute to the complete equation, the main ones we're concerned with here are internet and power. Running a node on Ethereum requires between 500 GB and 4 TB of bandwidth every month. It also necessitates connecting to numerous peers in a peer-to-peer (P2P) network. Unfortunately, many internet service providers (ISPs) worldwide don't offer plans that support these use cases or could potentially throttle their service above a certain bandwidth usage or when they detect substantial P2P traffic. The default home modem + router combination can also be underpowered and struggle to maintain numerous connections with peers. Services can vary significantly depending on your physical location. It's often challenging to determine the quality of internet service you will receive, even if you thoroughly read the fine print in your contract. Reputable hosting providers will provide you with all the necessary information upfront about their networking and internet service for each plan.
Being without internet or power for a regular node means you cannot access Ethereum. Having a power or internet outage for a staking node means your validators will slowly start losing money due to penalties for missing timely duties. Additionally, having adequate hardware components can also be an issue to address.
Hosting providers can mitigate some of these concerns. Reputable hosting providers will have redundant internet providers, redundant network devices, redundant power supplies, and robust backup power systems. A great hosting provider will manage all hardware issues for you. They usually disclose the hardware components they utilize and often employ server-grade hardware.
EthStaker's Hosting Provider Recommendation
OVHcloud is a recommended hosting provider for Ethereum staking. They offer a dedicated server plan, unmetered public bandwidth, and a policy of being friendly to crypto-related use cases (except mining).
Cost-Benefit Analysis for a Staking Node
While securing the Ethereum protocol is generally not considered an investment, you can profit from performing this task. I will use the simple solo staking case here for the cost-benefit analysis. A solo staker is someone who will perform multiple 32 Ether (ETH) deposits to run one or more validators independently. I will also use USD as the stable currency and the owner's preferred currency for this analysis.
The total benefits or profits you can make by staking can be denoted with a simple formula: the final profit plus the recurring profit minus the initial cost minus the recurring cost, or TP = FP + RP - IC - RC, where:
- TP is the total profit
- FP is the final profit
- RP is the recurring profit
- IC is the initial cost
- RC is the recurring cost
Let's assume someone commits to running validator(s) for a specific period, with a specific number of validators, and that person has to exchange USD to purchase ETH initially and wants to obtain USD at the end. We will define an initial exchange rate and a final exchange rate. The initial cost of running these validators will be primarily the stake required for each validator: the number of validators someone wants to run multiplied by 32 ETH multiplied by the initial USD exchange rate for ETH, or IC = V 32 USDr1, where:
- V is the number of validators someone wants to run
- USDr1 is the initial USD exchange rate for ETH
Similarly, the final profit someone will receive from staking is simply the return of their stake for each validator: the number of validators someone wants to run multiplied by 32 ETH multiplied by the final USD exchange rate for ETH, or FP = V 32 USDr2, where:
- USDr2 is the final USD exchange rate for ETH
As you can see, someone staking will be well exposed to the USD <> ETH exchange rate. All profits are denominated in ETH until they are converted back to another currency. This exchange rate can significantly impact the total profits someone can obtain. You can expect someone delving into staking to have a strong confidence in the ETH value or someone with a high-risk tolerance.
By using a hosting provider, the recurring costs are primarily the plan cost: the monthly cost of the hosting plan multiplied by the number of months someone will commit to staking, or RC = MC * M, where:
- MC is the monthly cost of the hosting plan
- M is the number of months someone will commit to staking
The recurring profit generated from staking is liquid and can be sold immediately after it is withdrawn from the validator's balance or deposited directly into the fee recipient address. For simplicity, I will assume they are converted back to USD at the end of the commitment period. The recurring profit can vary widely depending on factors such as the chances of being selected to propose a block and the fees that can be extracted when proposing a block. For simplicity, I will use a generic average rewards rate. Note that there can be some variance from that average rewards rate to the final rate, but that difference should be smaller the longer the commitment period and the larger the number of validators someone wants to run. The average rewards rate is also dependent on the Ethereum protocol usage and the number of active validators on the network. The more transactions and users there are on the network, the higher the average rewards rate tends to be. The more validators there are, the lower that average rewards rate tends to be. The recurring profit can be denoted with this formula: the number of validators someone wants to run multiplied by 32 ETH multiplied by the average rewards rate multiplied by the final USD exchange rate for ETH, or RP = V 32 ARR M USDr2, where:
- ARR is the average rewards rate over the commitment period per month
This analysis assumes that proper maintenance and monitoring are performed on the staking node to follow all client updates and any other necessary steps to keep it functioning properly. Under normal circumstances and with a proper initial setup, maintenance and monitoring are generally minimal.
There are various other protocols or staking tools that can expose you to the rewards given to stakers without having to spend 32 ETH for a single validator. Some of them offer rewards on a fraction of a validator, for instance. These options can be a good alternative if you cannot afford 32 ETH for a whole validator.
A Few Concrete Examples
Let's use OVHcloud Advance-1 dedicated server plan as our hosting plan. This plan is an excellent offering for running an Ethereum node for several reasons. It comes with a 1Gbit/s unmetered public bandwidth. It is available in numerous regions. It has various storage options. For a great staking setup, you want fast SSDs to run your node. My base setup will be to use the 2x1.92TB SSD NVMe Soft RAID option at $139.37 USD/month (with a 12-month commitment) in the Europe - North America region.
Let's assume the average rewards rate is 3.66% per year, which is approximately the current rate as of today. Our monthly cost for the hosting plan will be $139.37 USD.
Example 1
Let's simplify the total profits formula by assuming that the initial and final USD exchange rates for ETH will be the same, or USDr1 = USDr2. We are left with a much simpler total profits formula: recurring profit minus recurring cost, or TP = RP - RC. Let's also assume that the USD exchange rate for ETH will be $2,938 USD/ETH, the current exchange rate as of today.
Let's compare running 1 validator and running 2 validators for a 2-year period.
For both cases, our recurring cost will be: RC = MC * M = $139.37 USD/month times 24 months = $3,344.88 USD
For 1 validator, our initial cost will be: IC = V 32 USDr1 = 1 validator times 32 ETH times $2,938 USD/ETH = $94,016 USD
For 1 validator, our recurring profit will be: RP = V 32 ARR * USDr2 = 1 validator times 32 ETH times 3.66%/year times 2 years times $2,938 USD/ETH = $6,881.97 USD
For 1 validator, our total profits will be: TP = RP - RC = $6,881.97 USD minus $3,344.88 USD = $3,537.09 USD
For 2 validators, our initial cost will be: IC = V 32 USDr1 = 2 validators times 32 ETH times $2,938 USD/ETH = $188,032 USD
For 2 validators, our recurring profit will be: RP = V 32 ARR * USDr2 = 2 validators times 32 ETH times 3.66%/year times 2 years times $2,938 USD/ETH = $13,763.94 USD
For 2 validators, our total profits will be: TP = RP - RC = $13,763.94 USD minus $3,537.09 USD = $10,419.06 USD
With 1 validator and a $94,016 USD investment, the result would be a $3,537.09 USD profit over 2 years, or approximately a 3.76% return. With 2 validators and a $188,032 USD investment, the result would be a $10,419.06 USD profit over 2 years, or about a 5.54% return. As you can see, the return rate improves with the number of validators you run on a single machine, as the cost of that machine is fixed.
Example 2
Let's assume we are speculating on the price of ETH and the USD exchange rate for ETH. As mentioned previously, anyone willing to engage in staking is likely to have strong confidence in its value over time. Let's assume the price of ETH will be 20% higher after a 2-year staking commitment. Let's assume we are running 2 validators. Let's also assume that the initial USD exchange rate for ETH will be $2938 USD/ETH, the current exchange rate as of today. This means our final USD exchange rate for ETH will be 20% higher, or $3,525.60 USD/ETH.
Our recurring cost will be the same as in Example 1: RC = MC * M = $139.37 USD/month times 24 months = $3,344.88 USD
Our initial cost will be: IC = V 32 USDr1 = 2 validators times 32 ETH times $2,938 USD/ETH = $188,032 USD
Our final profit will be: FP = V 32 USDr2 = 2 validators times 32 ETH times $3,525.60 USD/ETH = $225,638.40 USD
Our recurring profit will be: RP = V 32 ARR * USDr2 = 2 validators times 32 ETH times 3.66%/year times 2 years times $3,525.60 USD/ETH = $16,516.73 USD
Our total profits will be: TP = FP + RP - IC - RC = $225,638.40 USD plus $16,516.73 USD minus $188,032 USD minus $3,344.88 USD = $50,778.25 USD, or about a 27,01% return rate over 2 years with a $188,032 USD investment. Compared to simply holding ETH over the same period, you get a bonus 7.01% return rate.
This last example makes several assumptions and is quite speculative, but it can give you an idea of the potential profits available with staking.
