Cryptocurrency staking is a central concept in the crypto world.
Cryptocurrency investors worldwide enjoy the income created through cryptocurrency trading or mining. You’ve probably heard of the success stories of crypto investors making millions of dollars by investing early and selling when the crypto-assets’ prices are high.
However, making a profit from cryptocurrency fluctuations can be challenging and requires specific knowledge, time, and skills. Likewise, crypto mining requires technical expertise and significant upfront investment in specialized hardware.
If you’re trying to figure out how to make money from the cryptocurrency markets without investing lots of money and time, you might consider staking on decentralized finance (DeFi) networks. Many DeFi protocols offer great incentives for those who stake crypto and lock them into smart contracts by providing interest on investment and governance tokens.
At its most basic, staking cryptocurrency lets you make money on cryptocurrency stored in your crypto wallet. It’s the process of investing money into digital coins and collecting interest and fees from blockchain transactions.
Cryptocurrency staking involves locking up your funds in your personal cryptocurrency wallet for a specific period to contribute to the performance and safety of the blockchain network and earn rewards in the form of additional coins or tokens.
This article will explain everything you need to know about staking Ethereum for earning ETH staking rewards. We’ll also explore Ethereum’s upgrade to Ethereum 2.0 by switching from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism and provide a quick tutorial on how to stake Ethereum.
So, without further ado, let’s get started!
What Is Staking
Staking is a popular way to generate extra income with your cryptocurrencies if you plan to hold them for a specific period. Most major cryptocurrency exchanges provide platforms for staking cryptocurrency, allowing you to earn passive income for holding cryptocurrency on the exchange.
Staking only applies to blockchains that utilize the Proof-of-Stake (PoS) consensus mechanism, in which staking is used to validate transactions. In a PoS consensus, a participant node is allocated the responsibility to maintain the public ledger. On a Proof-of-Stake blockchain, the right to verify transactions is assigned to users randomly, based on the number of tokens they have staked. So, holders of a required number of coins can earn staking rewards and participate in validation, i.e., verify transactions as needed. As you can see, you can stake coins to earn interest instead of trading them.
Users staking assets in a PoS blockchain for an agreed-upon period to earn rewards in return are called validators. PoS validators provide value to the network and are selected based on the higher number of staked coins.
A Proof-of-Stake blockchain is less power-consuming and, therefore, solves scalability issues faced by a Proof-of-Work blockchain, in which miners have to compete to solve complex mathematical problems to verify and process transactions and add them as a new block in the blockchain. The PoW mechanism of verifying transactions on the blockchain is robust and secure but also very time-consuming and requires a lot of power consumption. This hinders the number of transactions that can be processed by a blockchain simultaneously and therefore causes a scalability issue.
Ethereum is switching from a Proof-of-Work to a Proof-of-Stake consensus mechanism, called Ethereum 2.0 (ETH 2.0), aiming to improve the Ethereum network’s scalability and security. The full upgrade will be completed by 2023.
To learn more about staking and how it’s different from yield farming, go to “What Is Staking.”
What Is Ethereum 2.0
The Ethereum blockchain is a general-purpose blockchain, acting as the foundation for thousands of applications, blockchain networks, tokens, etc. What makes Ethereum innovative is its ability to support smart contracts, the backbone over which decentralized apps are built. The Ethereum blockchain enables developers to create ERC-20 tokens and incorporate them into their own protocols. Moreover, most of the altcoins, NFTs, etc., are built on the Ethereum network and are ERC-20 and ERC-721 tokens, respectively.
While these features of the Ethereum blockchain have paved the way for the mass adoption of cryptocurrencies across the globe, its popularity also means the Ethereum network has reached certain capacity limitations. As a result, transaction costs on the network, commonly known as the gas fees, have sky-rocketed, thereby making it difficult for non-finance decentralized apps to operate on the Ethereum blockchain. These limitations have created the need for “scaling solutions,” aiming to increase transaction speed (faster finality) and transaction throughput (high transactions per second) without sacrificing decentralization or security.
The long-awaited Ethereum 2.0 is a response to these concerns. The ideas behind the upgrade are to make Ethereum simultaneously more scalable, secure, and sustainable – while remaining decentralized. The upgrade is known as The Merge, where Ethereum will switch from a Proof-of-Work to a Proof-of-Stake mechanism. As a result, the network’s ability of processing transactions would reach up to 100,000 transactions over a second, in contrast to the 15 transactions per second of the Ethereum network. The upgrade will also significantly reduce the gas fees on the Ethereum 2.0 network.
How Does Ethereum Staking Work
The Beacon Chain is the new consensus mechanism of Ethereum 2.0. Validators, also known as stakers, are responsible for processing transactions, storing data, and adding blocks to the Beacon Chain. As a reward for their staking, they earn interest on their staked ETH.
The requirement for becoming a validator is a staking minimum of 32 ETH tokens. Validators are required to produce new blocks and confirm any new blocks not made by them. If a validator fails to validate a block assigned to them by going offline or engaging in collusion or other mischievous activities, they’ll lose a large portion or the entirety of their stake. This brings an enhanced level of security to the network and protects regular users from issues that arise due to network or validator failure.
In Ethereum’s blockchain, under the PoS mechanism, 32 blocks of transactions are bundled during each round of validation, which lasts on average 6.4 minutes. Each such bundle is called an Epoch, and once two additional Epochs are added after it, an Epoch is considered irreversible or finalized.
Ethereum’s blockchain is divided into shards, and the Beacon Chain divides a validator node or stakers into a “Committee” of 128 and assigns them to a specific shard block. Each committee is allotted a ‘slot’ to propose a new block and validate the inside transactions. Each epoch has 32 slots, requiring 32 sets of committees to complete the validation process. From the 128 validators, a validator node is randomly assigned to propose a new block, while the remaining 127 members vote and validate transactions. The new block is added to the blockchain, and a “cross-link” is formed to authenticate its insertion once a majority of the committee has attested it. The validator chosen randomly to propose the new block gets the native block rewards. A block is finalized on the blockchain only when two-thirds of the validators agree, and if validators try to reverse this later with a 51% attack, they will lose all their staked ETH.
Why Stake Ethereum
Now that you know what staking is and how staking works let’s look into the reasons you should be staking Ethereum:
- Earn Staking Rewards: Staking Ethereum requires a minimum of 32 Ethereum tokens, and the APR (annual percentage rate) for staking ETH is anywhere between 6 to 15 percent. Once you stake Ethereum tokens, you can earn rewards between 2 and 5 ETH at current prices for a minimum of 32 tokens. And the more Ether tokens you stake, the more ETH you can earn as a reward. Start by checking the Ethereum Price.
- Stronger Security: If you’re a blockchain enthusiast wanting to contribute to providing stronger security to users, start your Ethereum staking asap. The larger the amount of staked Ethereum on the network, the stronger security the network will provide. To become a threat, attackers would need to control the majority of Ethereum tokens in the system.
- Environment Friendly: Staking Ethereum or any other cryptocurrencies is more eco-friendly and less energy-consuming than mining. It’s important because the energy consumption for Bitcoin mining has become a real issue. With ETH 2.0, we’re moving towards an environmentally sustainable blockchain.
How to Stake Ethereum
Now that you know why you should be staking ETH let’s proceed to a detailed guide on your staking options for staking Ethereum and learn where and how to stake Ethereum.
1. Solo Staking
Solo Staking is the best way to stake Ethereum. In solo staking, you run an Ethereum node by yourself on the internet; therefore, the rewards you earn for staking ETH belong entirely to you. However, there are a few limitations in solo staking Ethereum; for example, you need a minimum of 32 ETH to stake Ether, which is a vast amount of money. Another drawback is you must be connected to the internet at all times, as the Ethereum network penalizes nodes that go offline. Last but not least, to solo stake Ethereum, you must have technical know-how about it, something that most people lack. If you’re interested in staking Ethereum by yourself, you can do so at ethereum.org.
2. Staking Services
Several service providers can run a validator node on your behalf and remove the need for being connected to the internet at all times and having technical know-how. They provide staking ETH as a service, and all you have to do is deposit your 32 ETH tokens to start earning staking rewards. These services charge a small fee on a monthly basis for staking Ethereum on your behalf. Moreover, your staked ETH is not under your control, so it requires a certain level of trust in the service provider. Gemini, a reputable exchange, offers staking services at a reasonable rate.
3. Staking Pools
A staking pool is the most popular staking model allowing users to participate in various staking platforms and earn rewards. A staking pool is simply a liquid staking solution where you don’t need 32 ETH for staking ETH. Staking pools collect a small amount of ETH or other staked assets from different users to run the node. The protocol rewards are distributed amongst the users that have staked their crypto assets in proportion to how much ETH or other assets are staked. The liquid staking platforms charge a small fee. A staking pool is one of the most viable solutions for users that don’t want to stake 32 ETH but are into earning rewards through Ethereum staking. Lido and Rocket Pool are two of the most popular liquid staking protocols for securely staking your Ethereum.
4. DeFi Staking
While many staking pools that provide staking services are centralized and take control over your staked Ethereum, decentralized staking protocols such as Yield.finance allow you to stake Ethereum in a decentralized manner. The benefit of decentralized staking is that it gives you more control over your staked ETH. These platforms also offer stETH tokens that can be used in the DeFi ecosystem for activities such as getting a loan, earning yield, trade-staked ETH tokens, etc.
5. Staking Ethereum on Crypto Exchanges
Several crypto exchanges offer Ethereum staking services to their users. We’ll take the Coinbase exchange as an example for staking Ethereum tokens on an exchange platform. To start staking Ethereum on Coinbase, follow the steps highlighted below:
- Create a Coinbase Account:
The first step is creating a Coinbase account through the website or the Coinbase mobile app. You must enter a valid email address and complete your KYC verification to use Coinbase.
- Buy Ethereum:
If you already have Ethereum tokens in other cryptocurrency wallets, you must send them to your Coinbase wallet. Otherwise, you need an Ethereum wallet with Ethereum tokens to start staking. You can also buy Ethereum tokens directly on Coinbase. To learn how to buy Ethereum (Ether) tokens, check the CoinStats guide “How to Buy Ethereum.”
- Stake Ethereum:
Once you have sufficient Ether tokens in your wallet, you can stake ETH easily after meeting the requirements mentioned on the Coinbase website. While there is no minimum amount of Ether tokens required to stake ETH on Coinbase, there is a maximum staking limit that keeps changing over time. Remember that if you stake ETH on the Coinbase crypto exchange, it’ll keep your ETH locked. Crypto investors can view their staked Ether tokens as ETH 2.0 balance under lifetime rewards, but they won’t be able to withdraw the staked coins until the Ethereum 2.0 (ETH 2.0) Merge is completed.
Also Check: How to Stake on Coinbase
Risks Associated With Ethereum Staking
Like with most things associated with the blockchain industry, there are some inherent risks associated with ETH staking. Some of the most commonly faced risks of Ethereum staking are:
- Loss of Control Over Funds:
This is a common risk associated with ETH staking or any form of staking in general. Once you’ve decided to get your ETH staked, you’ll temporarily lose control over your assets. Remember to check if the protocol providing high APY is trustworthy, as staking in risky protocols will put your ETH at risk and might result in losing all your deposit.
- Lack of Regulatory Mechanisms:
No regulatory frameworks are in place for cryptocurrencies. So, while staking Ethereum, if the government decides to freeze your assets or ban cryptocurrencies, there’s nothing you can do.
- Locked Ethereum:
When you stake ETH, your ETH tokens are locked, and you won’t be able to withdraw or use them until the Ethereum 2.0 (ETH 2.0) Merge is completed. While the Ethereum Foundation has hinted at September 2022 as the date for the Merge, there is no guarantee that it’ll happen on time as it has regularly faced delays due to complex technical issues.
Ethereum was a pioneer regarding smart contracts, on which the whole Web3 is built, and the catalyst that helped the adoption of blockchain globally. With the move towards PoS blockchain, Ethereum 2.0 will become faster, more scalable, and sustainable. It will enable high transaction throughput and low gas fees without sacrificing decentralization or security.
So, start staking Ethereum today and become part of the oncoming revolution while also earning a stable passive income.
However, remember that cryptocurrencies are highly volatile, and you should always do your own research before investing in them. Nothing in this article is a piece of financial advice, and you should only invest what you can afford to lose, as permanent and complete losses are widespread in crypto, as witnessed in the recent $LUNA crash.
If you’re interested in learning more about DeFi and how to make the most of it, visit our complete guide, “What Is DeFi.” To learn more about keeping track of all your portfolios, check out our guide on “crypto portfolio trackers.”