Why ETH Options are Essential as we Transition to Proof-of-Stake

OP-ed disclaimer: This is an Op-ed article. The opinions expressed in this article are the author’s own. CoinCodex does not endorse nor support views, opinions or conclusions drawn in this post and we are not responsible or liable for any content, accuracy or quality within the article or for any damage or loss to be caused by and in connection to it.

By Tom Howard, Business Development & Growth at PowerTrade

Ethereum is evolving. The Ethereum blockchain will soon move to a proof-of-stake consensus from proof-of-work. This move will welcome what the Ethereum Foundation calls ETH 2.0, and while it’s true that this change will fundamentally alter the blockchain for the better in the long-term, in certain instances, a PoS model could prove risky for some investors. The good news is that the Ethereum community benefits from the perspective and experience of the many other blockchain projects already operating on a PoS consensus model. We know what to expect and where the risks lie. So, let’s discuss the change, what it means in a larger context across the ETH ecosystem, and what investors can do to protect their assets and make the most of the move to ETH 2.0.

The Good, the Bad, and the Slightly Less Attractive

The implications of the move to PoS are multifaceted. Primary among the good changes this transition brings is that, overall, PoS consensus requires a fraction of the energy expenditure the traditional PoW model requires. I think we can all agree; planet Earth is pretty essential to the continued success of projects like ‘life as we know it,’ so without belaboring the point, let’s concede this change is a huge positive. 

Other significant benefits include creating a more diverse and decentralized network. With PoS anyone can run a node, and even more attractive is that anyone, regardless of the amount of ETH they hold, can join a staking pool to earn a return on their investment. The scalability benefits of sharding also make the entire network more convenient to use as it increases overall throughput. The long and the short of it is: a PoS system is great news for almost everyone taking part in the Ethereum ecosystem.

However, the on-chain staking of ETH does not arrive without some risk in tow. There are scenarios where staking increases the chance that your investment could be significantly reduced in a few key ways. For instance, if you decide to function as a validator, you do not only agree to lock up your stake on the network– your deposit could also dwindle for failing to stay up and running at all times. Whether this loss of uptime is accidental or not wouldn’t matter; the impartiality of a smart contract only sees the node was down—the reason is immaterial. Negative recourse occurs no matter what the cause.

Those not running a node face an even more common danger: negative market movements. If ETH sees a downward correction into the red, losing value relative to USD, no matter your APY percentage via staking, you’re at risk of significant losses. For example, if you earn 5% APY while staking but ETH loses its value over the course of the year, you would be sitting on a net loss. What can investors do to prepare for situations such as this and hedge their bets?

Put Options on the Table

Options trading allows investors to engage in staking while also mitigating risk. For example, with put options, an investor can hedge the downside in multiple ways, so if the value of ETH drops, their investment is protected. Alternatively, suppose there is a period where ETH hits an all-time high, and an ETH holder wants to lock in their profits. In that case, they can also utilize a put to cash out if the market falls back below the pre-designated threshold price they’re comfortable with.

Call options can also help manage price fluctuations and ensure you keep what you’ve earned. With a call, you can get in “early” at the beginning of a pump and break free from the FOMO that would creep in as the price of ETH continued to skyrocket. Or maybe someone holding USD wants to earn a consistent return rate without risking exposure to the volatility of the crypto market; they could do that with derivatives, resulting in lower APR but protecting their investment overall. Perpetuals and derivatives trading, just as in the TradFi markets, can help further protect crypto assets in the same way. With options, we can do all of the above and stay ahead of the game.

Profit Mapping

We are explorers of a new world, and thankfully we have brought tools that can help make the process more comfortable, secure, and risk-averse. The crypto market has already experienced exponential growth and outperformed any other asset class in history, and this is still just the beginning. Our job as stewards of a new economy should be to help lower the barrier of entry for all savvy investors by helping circumvent overly technical details like blockchain forks or proof-of-stake vs. proof-of-work. None of that matters if we approach things with a bit of forethought and some options up our sleeves.

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