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 you stake Ethereum, 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 enables users to utilize cryptocurrencies in various ways. 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. Through this upgrade, commonly known as ETH 2.0, new Ethereum tokens will be generated by staking, which consumes 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 technical, so you must do adequate research before starting.

Even though this is the best way to earn staking rewards on the Ethereum network, it is not without risks. For example, you cannot withdraw your staked ETH until sometime in the future, and you risk losing them altogether if the blockchain slashes your stake.

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. However, you do not need to actually validate transactions; you can assign that to a third party and still reap your rewards.

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

This service is for interested stakers who do not have up to the minimum number of tokens required to stake directly on the Ethereum network. 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 with 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 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 services distribute rewards to token holders in proportion to how many receipt tokens they hold. 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 passes, the block is inserted into the blockchain, and a new committee is formed, starting the process over again.

Once 32 blocks have been proposed and validated in this way, they are bundled together into epochs. The transactions in the epoch are considered finalized or irreversible if the blockchain adds two more epochs after it.

Benefits Of Ethereum Staking

Contribute to the Blockchain

By staking your tokens directly in the Ethereum network, you are contributing your quota to making Ethereum a more secure blockchain. This is because the more validators there are, the more legitimate ETH transactions will be.

You also gain a sense of community with hundreds of thousands of like-minded crypto enthusiasts who also stake 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 the different ways of staking Ethereum, it is easy to find at least one that suits your budget and preference. And most of these staking methods require little or no expertise. So all you need most of the time is to deposit your capital and wait patiently as the blockchain doles out 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 be due to aggregating your ETH tokens with a fraudulent staking pool, staking with an insecure platform, or using a faulty computer to run a validator node. Using a faulty computer to run a node could result in slashing - a situation where the blockchain fines a fraudulent or inaccurate validator by confiscating its staked ETH.

High Fees

You may have to pay some fees depending on where you stake your Ethereum tokens. Centralized exchanges, staking pools, and Staking-as-a-service agencies will all want their cut out of the rewards of staking your Ethereum tokens. Some of them (like Coinbase exchange) may charge as high 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 stETH tokens are pegged to Ether's value and can be used in various activities 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 against any of the supported financial assets on the platform. 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 rewards stakers with rETH at a 1:1 ratio to deposited ETH. 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). Partakers in its liquid staking service can deposit as little as 0.01 ETH and earn about 4.03% APR on average.

Binance

In keeping with its status of being a partaker in most crypto activities, Binance also offers liquid staking services for Ethereum stakers. 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 staking rewards that go as high as 5.2% APR.

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. If you decide to stake Ethereum, you should start small to test it out before committing a larger part 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 receiving 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.