3 things to consider before staking your ETH
On July 2015, the Ethereum network officially launched to provide a decentralized platform that would facilitate the building of decentralized apps and create permissionless agreements among peers. Today, Ethereum has not only accomplished that, but become the largest smart contract blockchain.
Ethereum is upgrading the blockchain from the energy-ineffiecient Proof of Work consensus model to the eco-friendlier Proof of Stake (PoS) model.
Source: Ethereum Foundation
In the PoS model, transactions are validated by validator nodes. Anyone can become a validator by staking their ETH, which requires putting up ETH as collateral. Staking ETH is a strategic way of earning "passive income" for ETH hodlers who believe in the Ethereum network. Many stakers see staking ETH as holding ETH and getting paid for it.
Should you stake your ETH? Here are 3 things you need to consider before you do so:
1. Where is ETH Staking headed?
Source: Trent Vanepps
The Eth merge started on December 2020 and is estimated to complete on August 2022. Although the developers have encountered some issues during the merge process, the merge has continued to power through and surpass speculators' expected progress timeline.
Why stake ETH
Secure the network: Staking ETH provides economic security for the Ethereum blockchain.
Earn rewards: By confirming transactions, validators are rewarded with ETH through staking rewards.
Vote for the future: Staking ETH allows validators to vote on governance proposals and contribute to making decisions on the future and direction of the network.
State of ETH staking after the Merge
Validators need to stake their funds as collateral so that they can be penalized if they dishonestly confirm transactions. As a result, their ETH is locked during the staking period.
Even after the merge, you will not be able to unstake your ETH, which means that your staked ETH will remain locked up. As of yet, the developers have not specified when unstaking will be possible.
2. Different ways to stake ETH
You can either stake ETH by yourself, or hand your ETH to third parties to stake on your behalf. Ethereum only accepts validator nodes that stake 32 ETH into the contract. In order to allow many users to stake, services that help users with technical setups and lower depositing methods have come up.
There are 2 ways you can stake ETH by yourself:
Solo staking: You set up your own validator node, which requires technical know-how, and deposit 32 ETH directly to the ETH staking contract.
Validator-as-a-Service (VaaS): You rely on a service to take care of the technical set up of your validator node, but you still get your own validator keys and deposit 32 ETH.
There are 2 ways you can stake through a third party:
Staking Pool: You rely on someone else to run the validator node and can deposit generally any amount of ETH. The staking pools consolidate deposits and pool batches of 32 ETH to validator nodes.
Centralized Exchange: Exchanges provide staking services similar to staking pools. They are geared towards users who do not hold their ETH in a wallet and want to enjoy the convenience of staking straight from their exchange platform.
Source: Ethereum Foundation
Staking as the validator
If users are ready to stake by themselves, they get to enjoy the maximum amount from staking their ETH and gain control over their validator keys.
Ethereum identifies solo validating as the "gold standard" for staking because it provides full participation rewards, improves the decentralization of the network, and never requires trusting anyone else with your funds.
32 ETH for staking
Reliable computer connected to the internet at all times
Technical skills to set up validator node
Validator operators take care of the technical part so that becoming a validator is easy. The operators help with:
Creating a set of validator credentials
Uploading your signing keys
Depositing your 32 ETH
Staking with a third party
Staking with a third party is easier and faster. Additionally, users can get a liquid asset in return for their staked ETH so that they can still use the liquid asset to experience DeFi.
There are two types of third party staking services: decentralized protocols and centralized exchanges. Making a decision between the two comes down to reward rates and trust.
Centralized exchanges allow hodlers who are only storing their ETH on the exchange to earn yield with minimal oversight or effort. However, centralized exchanges run huge numbers of validators to distribute the large pools of ETH provided by their users. This creates a centralized target, making the network more vulnerable to attack. For instance, while Coinbase is considered safe because they guarantee users' deposit, a large swath of users stake through Coinbase, decreasing the security of the Ethereum network.
Some exchanges that provide ETH staking service:
Staking Pools/ Decentralized pools
Decentralized ETH staking protocols are mostly already audited, open-sourced and onboard a diverse set of clients to maximize the security of the Ethereum network. They also provide higher yields compared to Centralized exchanges.
Generally, the crypto community prefers using decentralized protocols for staking to strengthen the decentralization factor of Ethereum.
Top Decentralized protocols:
3. How much can you make from Staking ETH?
ETH Staking reward rates depend on the total amount staked on the Ethereum network. Today, staking rewards range from 3.81% APR to 4.11% APR depending on your method of staking.
Validators get rewarded in ETH. Depending on the kind of staking method you choose, how you access your rewards change.
Validator or Staking-as-a-Service
Rewards cannot be withdrawn for an indefinite amount of time. Ethereum will only enable withdrawals after the Shanghai upgrade following the Merge. You can get the latest updates about the Merge on the Ethereum Merge webpage.
Staking Pools or Exchange Staking
Many staking pools and exchanges provide a token that represents a claim on your staked ETH. This is known as liquid staking. Rewards are also collected in the form of the token provided by the platform.
For example, users receive their rewards every few days when they stake ETH through Omni, which uses the Lido protocol for staking ETH.
How the number of validators affects ETH staking returns
On the date of this writing, a total of 13.6+ million ETH is staked. As the number of validators increase, the earnings from staking will likely decrease. This is because the total allocated rewards are distributed to more people, which means that each validator gets a smaller percentage.
Below is Ethereum's proposal from 2019 for ETH staking returns based on the amount of ETH staked:
Max annual issuance
Max annual return rate
Risks that affect rewards
While the proposal of the return rates above are the maximum rates through the assumption that the amount of issued ETH rewards will not be affected. However, there are factors that can affect the issuance, which decrease the percentage of returns. Below is a summary from Eth Hub of these factors:
Validators going offline. Combining the individual and collective penalties, every 1% of validators offline cuts total issuance by around 3%, and if more than 33% ever go offline at once, this will lead to finality leaking which will incur extra penalties for offline validators.
Validators getting slashed. Probably will happen infrequently in practice.
Transaction fees being burned due to EIP 1559 (estimate ~10k ETH/year initially while usage is still low, ramping up to hopefully hundreds of thousands of ETH/year eventually)
What method should you use to stake ETH
While setting up your own validator node is the gold standard for staking ETH, many ETH holders who would like to contribute to the security of the Ethereum are not able to meet the 32 ETH threshold. Even in today's bear market, 32 ETH equates to more than USD$36,000. Not many people have that amount of money lying around for staking.
As a result, users look at their next best option: staking smaller amounts through a third party. Below are some factors you should consider when staking with a third party:
Locked funds vs unlocked funds
Liquid ETH staking makes it possible for you to use a token that is representative of ETH. If you need to use your staked funds for other DeFi activities, liquid staking is a good strategy.
For example, Lido, the biggest staking pool, provides their ETH depositors with stETH, which is a token that represents staked ether in Lido.
stETH tokens are minted upon deposit and burned when redeemed. stETH token balances are pegged 1:1 to the ETH that is staked stETH tokens can be used as one would use ETH, allowing you to earn ETH 2.0 staking rewards whilst benefiting from yields across decentralized finance products, such as borrowing or lending. Learn more about how you can earn extra yields from stETH.
Custodial Vs Non-custodial
Many users prefer having the keys to their funds, which requires using a non-custodial wallet to deposit your tokens. Protection of wealth is one of the cornerstone beliefs behind the adoption of cryptocurrencies. This culture also gave birth to the famous saying: “Not your keys, not your coins”.
Although using centralized exchanges are convenient, Ethereum encourages users to set up their own non-custodial wallet so that they can take full ownership over their funds and deposit their tokens to a staking pool safely.
Running your own validator is the best way to get maximum returns on your staked ETH. Relying on other services lowers the staking rates after the fee cut of staking through their providers. If you do not have 32 ETH to run a validator node, the next best alternative for maximizing returns are staking pools.
How to start staking with Staking Pools
The top 3 ETH staking pools today are:
You can start staking on Lido in seconds by using the Omni app, which lets you stake your ETH in 3 taps. Omni makes it easier than centralized exchanges to stake your funds and does not take a fee for staking your ETH through Lido.
So, not only do depositors experience the convenience of staking, they also get to maximize their returns! Follow the 3 simple steps below to stake with Lido today.
Send your ETH to your Omni wallet address.
Stake your ETH and start earning immediately!