Ethereum Staking
Understand what Ethereum is and how staking it works, including its risks.
Ethereum is one of the most popular cryptocurrencies for good reasons. Apart from the fact that it is at the center of most DeFi activities, it is also moving from a proof-of-work model to a proof-of-stake one. That means you can now stake ETH directly on the blockchain and earn rewards.
So, how can Ethereum be staked, and how profitable can it be? This article will center around answering those questions. We will also share some insights into the Ethereum blockchain and how you can find the best ETH staking platforms.
What Is Ethereum?
Ethereum is a decentralized blockchain platform that gives users different ways to use cryptocurrencies. It was created in 2013 by Vitalik Buterin and six other people to make up for the failings of Bitcoin. The Ethereum blockchain's native token is Ether, and it is the second-largest cryptocurrency by market capitalization.
Even though it is usually mentioned together with Bitcoin in crypto discussions, Ethereum is very different from Bitcoin. While Bitcoin is basically another currency, Ethereum is a foundational platform for building smart contracts and applications that apply digital technology in practical scenarios.
When Ethereum was introduced, it operated on the proof-of-work consensus mechanism. This meant that new Ethereum tokens were generated by mining, just like Bitcoin. However, since August 2021, Ethereum has been slated to upgrade to a proof-of-stake mechanism. With this update, which is often called "ETH 2.0," new Ethereum tokens will be made by "staking," which uses much less energy.
How Do You Stake Ethereum?
You can stake Ethereum in one of five ways:
directly on the blockchain as a validator,
using Staking-as-a-service,
joining ETH staking pools,
staking with an exchange, and
liquid staking.
We will now discuss each of them.
Staking ETH as a Validator
To stake Ethereum directly on the blockchain as a validator, you must deposit at least 32 ETH tokens. You should also have an advanced computer with high processing power that is always connected to the internet. Being an ETH validator is a bit complicated, so you need to do enough research before getting started.
Even though this is the best way to earn staking rewards on the Ethereum network, it is not without risks. For example, you can't withdraw the ETH you've staked until some point in the future, and if the blockchain cuts your stake, you could lose them all.
Staking-as-a-service (SaaS)
It is similar to validator staking in that you still need to lock at least 32 ETH tokens on the network. But you don't have to validate transactions yourself; you can give that job to a third party and still get paid.
To reduce the risk of putting your funds in the hands of a third party, the Ethereum network gives you a different set of keys to sign transactions. These keys are different from your private keys, which you use for withdrawals. So, your private keys are never exposed. Examples of Ethereum SaaS providers are Blox Staking, Kiln, and Abyss Finance.
Joining a Staking Pool
Interested parties who don't have the minimum number of tokens needed to stake directly on the Ethereum network can use this service. They can connect with other interested stakers, form a staking pool, and split the rewards. Most of these pools offer very low barriers to entry, while some even let you stake any amount.
Even though this service makes it significantly easier for retail Ethereum lovers to stake, it is not a direct service of the Ethereum network. Therefore, you should consider the rules and risks of each staking pool before joining. Popular examples are Stakefish and StakeWise.
Staking With an Exchange
You can also stake your ETH tokens on most major exchanges. This may be preferable for those who want the convenience of staking ETH on the same platform where they bought it. Still, remember that if your funds are on an exchange, they are not truly yours because you do not have complete control over them. Examples of exchanges that allow Ethereum staking are Coinbase, Binance, Kraken, etc.
Liquid Staking
Liquid staking is a way to stake Ethereum without locking up your tokens. How does it work? A liquid staking platform accepts your Ethereum tokens and gives you a receipt token, pegged to the value of Ethereum, which you can use for various crypto activities. So, your ETH tokens are still locked up, but your receipt tokens can be spent however you like.
Platforms that offer Ethereum liquid staking give token holders rewards based on how many receipt tokens they own. When the Ethereum upgrade is complete, and the locked tokens are released, you will be able to swap your receipt tokens back to pure ETH and withdraw. Examples of liquid staking platforms are Lido Finance, Rocket Pool, and Binance.
How Does Ethereum Staking Work?
Ethereum staking is powered by the Beacon chain, Ethereum's proof-of-stake coordination mechanism. This chain assigns transactions to validators and oversees the approval process. But how does it all go down?
The Beacon chain randomly groups 128 Ethereum stakers to form a committee. Each committee is responsible for recommending a new block that will be added to the blockchain. One of the stakers is then randomly selected to propose the block, while the other 127 vote on the proposal. If the proposal is approved, the block is added to the blockchain, and a new committee is formed to start the process all over again.
Once 32 blocks have been proposed and validated in this way, they are bundled together into epochs. If the blockchain adds two more epochs after an epoch, the transactions in that epoch are considered final and can't be changed.
Benefits Of Ethereum Staking
Contribute to the Blockchain
By staking your tokens directly on the Ethereum network, you do your part to make the Ethereum blockchain more secure. This is because the more validators there are, the more legitimate ETH transactions will be.
You will also feel a sense of community with hundreds of thousands of other crypto enthusiasts who are also investing in Ethereum. Currently, there are about 13.4 million ETH staked on the Beacon chain by over 400,000 active validators. You, too, can be a part of that growing community.
Passive Income
With so many different ways to stake Ethereum, it is easy to find one that fits your budget and preferences. And most of these staking methods require little or no expertise. So, for the most part, all you need to do is deposit your funds and wait for the blockchain to distribute your rewards.
More Reliable
Ethereum is the largest of all the PoS coins. It has the most use cases and the most significant market capitalization. Therefore, it is a more stable option for cryptocurrency staking. However, remember that it is still a volatile crypto asset, so your capital is still at risk if you invest in Ethereum.
What Are the Risks?
Longer Wait Time
Because the transition from PoW to PoS for Ethereum is still underway, all staked ETH tokens are locked up until long after the merge is complete. There is no definite time for that, so you may have to wait a while. Thankfully, some platforms have introduced liquid staking (explained above) to counteract this risk.
You May Lose Your Stake
This can happen if you combine your ETH tokens with a fake staking pool, stake on an unsafe platform, or run a validator node on a computer with a bug. Using a broken computer to run a node could lead to "slashing," which is when the blockchain takes a validator's staked ETH as a fine for being dishonest or wrong.
High Fees
You may have to pay some fees depending on where you stake your Ethereum tokens. Staking pools, centralized exchanges, and staking-as-a-service providers will all want a cut of your Ethereum token rewards. Some of them (like Coinbase Exchange) may charge as much as a 25% fee on your staking rewards.
Where Can You Stake ETH?
Due to Ethereum's popularity among crypto enthusiasts, several platforms now offer ETH staking services. Here are some of the most popular ones:
Lido Finance
Lido Finance is a staking platform that allows users to stake any amount of ETH and get stETH in return. The value of the stETH tokens is tied to the value of Ether, and they can be used in a number of ways across the DeFi ecosystem. Its rewards rate is currently at 3.9% APR, with over $6 billion worth of ETH staked in its protocol. Apart from ETH, it also offers staking services for Solana, Polkadot, Polygon, and Kusama.
Uphold
Uphold is a digital asset platform that allows its users to buy and sell crypto assets, stocks, equities, and other financial products. On top of that, it also offers staking services for 13 cryptocurrencies, including Ethereum. You can also trade Ethereum directly with any of the other currencies that the platform supports. The current APY for staking ETH on Uphold is 4.25%.
Rocket Pool
Rocket Pool is an Ethereum-only staking service that allows you to be an Ethereum validator with only 16 ETH tokens. It is also a liquid staking platform that gives bettors rETH equal to the amount of ETH they put in. For its validator service, you stand to earn up to 4.86% APR in ETH rewards along with RPL rewards (RPL is Rocket Pool's native token). Participants in its liquid staking service can deposit as little as 0.01 ETH and earn about 4.03% APR on average.
Binance
Binance is involved in most crypto activities, so it makes sense that it also offers services for people who stake Ethereum. Users who deposit ETH with Binance's ETH 2.0 staking get BETH tokens in return, which can do everything ETH can. They also stand to earn stake rewards that go as high as 5.2% APR. You can read more about it in our Binance review.
Conclusion
Ethereum staking will only become more popular as the network's upgrades kick into effect. With this article, you now know what it means and how you can stand to benefit from it. Don't overlook the risks, though. Start small with Ethereum to get a feel for it before committing a larger portion of your portfolio.
Frequently Asked Questions
Are My Staking Rewards Taxable?
The IRS (Internal Revenue Service) and similar governmental bodies recognize staking rewards as income and therefore require stakers to pay income tax on them. In some cases, you may also have to pay a capital gains tax if your staking rewards increase in value after you receive them.
What Is Ethereum 2.0?
Ethereum 2.0 is the proposed upgrade to the Ethereum network that will allow it to be faster, more efficient, and more scalable. When all the phases of this upgrade are complete, Ethereum will be able to process up to 100,000 transactions per second (currently, it can only process 30). However, it is important to note that Ethereum 2.0 is an outdated name; the correct designation is 'Ethereum's consensus layer.'
How Profitable Are ETH Staking Rewards?
This depends on where you stake your Ethereum tokens. Staking directly on the blockchain will earn you about 4.54% APR, while it is approximately 4.03% if you stake with a staking pool. You can also get up to 5.2% APR when you stake ETH on Binance. Note that these earnings may be subject to fees.
How Much Capital Do I Need To Stake ETH?
To be a direct validator on Ethereum, you need to stake at least 32 ETH, which was about $48,000 when we wrote this article. However, many staking pools allow you to stake whatever amount you have. You will still earn rewards, but you won't be able to run validator nodes.
Disclosures
The content is only provided for informational purposes. It is not meant to be tax or financial advice, and it does not recommend any particular investment plan. Every investment has risk, including the possibility of a cash loss. Past performance does not guarantee future results.
Bitcompare does not guarantee good investment outcomes. The way a security or financial instrument did in the past does not show how it will do in the future. Before investing in options, clients should carefully assess their financial goals and risk tolerance. Due to the importance of taxes in all staking transactions, a customer who is thinking about staking should talk to a tax expert to find out how taxes affect the outcome of any staking strategy.