What’s at Stake: Will the Merge Turn Ether Into a Security?
Levitin’s argument is anchored in the Howey Test – detailed in a 1946 U.S. Supreme Court ruling often used to determine whether an asset is a security. To fully appreciate Levitin’s perspective, it’s important to understand Howey and the concept of staking in a proof-of-stake system.
Staking
Proof-of-stake is a consensus mechanism that allows all nodes on a blockchain to agree on the state of a network. It requires nodes called validators to propose and validate new blocks. Validators must pony up capital for a chance to participate in this process (whereas proof-of-work, the mechanism Ethereum is replacing, requires mining nodes to expend energy as they compete to find or “mine” the next block). This investment of capital is called staking.
Read more: What Is Staking?
The minimum staking requirement for Ethereum validators is 32 ETH, which is equivalent to roughly $53,000 as of this writing. The incentive for staking and investing hardware and software resources into a network is to earn rewards. According to the Ethereum Foundation, the nonprofit that guides software development for the network, validators can currently earn about 4.2% annually. For perspective, that’s nearly double what a one-year certificate of deposit (CD) from a typical U.S. bank would pay.
Validators are randomly chosen to propose and validate blocks. The higher the amount of staked ETH, the higher the probability of being chosen and rewarded (Ethereum has over 400,000 validators on its fledgling Beacon Chain). In other words, the more you stake, the more you make.
Read more: Proof-of-Work vs. Proof-of-Stake: What Is the Difference?