Ever since September 2022, it has been possible to stake on Ethereum. This was a huge moment in crypto history, as it made staking much more commonplace than it had been before, given the sheer size and scale of the Ethereum ecosystem. However, many people are still unsure about what exactly Ethereum staking is and how it works. Let’s delve into this topic and see how it compares to other forms of passive income.
What is Ethereum Staking?
Ethereum staking is the process of locking away some of your ETH onto the blockchain, as a way of validating blocks on the Ethereum chain. This helps keep the network active and functional.
What Is Ethereum 2.0?
Staking only became possible when Ethereum 2.0 launched. This is the updated and reformed version of Ethereum that came out in September 2022. With it came many architectural changes, with the switch from mining to staking being the most significant of them.
For most of Ethereum’s history, it functioned as a proof-of-work network, similar to Bitcoin. This meant that people could mine ETH by setting up machines that complete complex computations. However, for environmental and efficiency reasons, the team moved over to staking. Users can still earn ETH, but now it does not require the use of machines solving calculations, and rather simply validates users based on how much ETH they lock away, rewarding them in relation to this.
There are other factors that mark the shift to Ethereum 2.0, such as shard chains, which is a method of separating the network up to make it more scalable, and increased smart contract capabilities that help build more complex dApps. However, the switch to proof-of-stake was definitely Ethereum 2.0’s most famous feature.
How Does Ethereum Staking Work?
Ethereum staking works very similarly to staking on other blockchains. Here is a brief overview of how the process is set up and initiated.
Acquire ETH
To begin with Ethereum staking, you must first own some ETH.
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Choose Your Staking Option
There are two methods of staking with Ethereum. You can either stake on your own (known as solo staking), or you can use a pooling service, where you contribute with others. Solo staking is a good option if you own 32 ETH and are comfortable with the technical elements of running an Ethereum node (which is needed to validate blocks/transactions on the network).
However, if you are not tech-savvy on that level, or you do not own 32 ETH, then pooling might be more suitable. This is where you lock away a small portion of your ETH into somebody else’s node, and are rewarded with a portion of the ETH they make on return. Many people opt for this as it is simpler.
Start Staking
Once you have decided on one of these options, you can begin staking. Lock your ETH up on the blockchain and watch as you passively earn income. After a certain period of time, your ETH will unlock, and you will be free to use it as you wish.
Advice for Solo Stakers
If you solo stake, then you should make sure your node is set up correctly, and should monitor your progress periodically. While the Ethereum network is relatively safe and secure, it is a good idea to check in on it regularly, as staking has only been an option for a couple of years. Therefore, there could be outages or irregularities that occur.
Advice for Pooled Stakers
Keep up to date with your pooling provider. You should be checking to see if they are reliable, or if people have faced any issues with them. If something goes awry, you will want to remove your ETH as soon as possible.
Is Ethereum Staking Safe?
Ethereum staking is about as safe as any other form of staking. The biggest risk you face is with your asset depreciating in value during the process. The fact that you need to lock away some of your ETH during the staking process means that if the asset starts to drop in value, you cannot sell it until after the staking period ends.
Another potential risk is with the Ethereum 2.0 network getting hacked or compromised in some way. This blockchain is regarded as secure, so the chances are low, but the fact that staking is still relatively new for the network means that there is a non-zero chance of it occurring.
A Safer Alternative To Staking Your Ethereum
While Ethereum 2.0 staking is relatively safe, the issues posed can be off-putting. If you are looking for a method of earning a passive income, then a good alternative would be to use a crypto savings account. Services like Ledn allow you to hold your ETH and currently earn up to 4% APY on it. Choosing this option means you avoid the complexities of staking, whilst also working with a company that has a strong track record for safety, transparency, and risk management.
How Profitable is Ethereum Staking?
When aggregated across a range of staking methods, it appears you can make up to 3.70% per year on your ETH. This varies depending on the service you use or if you are solo staking. Plus, it fluctuates over time. However, in general, it hovers around here. This is a little lower than the maximum earnings you can make at Ledn, which currently is up to 4% APY.
The Advantages and Disadvantages of Staking Ethereum
Let’s add some dimension to this discussion by seeing what the pros and cons are of Ethereum staking.
Advantages of Staking Ethereum
We’ll start with the positives, to help explain why people turn to staking over other models for a passive income.
Support the Ethereum Network
You’ll find many people stake Ethereum because they support the blockchain and its ecosystem. Being a staker is an important part of the industry, and helps to keep the network decentralized and functional. And if you go so far as to be a node validator, then the title comes with some prestige, too.
Solo Staking is (Semi) Non-Custodial
Some people choose solo staking over other methods because of its non-custodial element. You do not need to trust a third party with your finances. Rather, you just rely on the code and architecture itself. However, staking is not fully non-custodial, as you technically are handing over your money to the network. This is not exactly a third party, but you still need to place your trust in something other than yourself.
A Well-Regarded Blockchain
The Ethereum network has some of the top minds in crypto working directly on it. There are many highly intelligent builders, developers, and programmers who maintain and expand the network. Plus, it is typically seen in a positive light in the industry. This means that it is unlikely to fall out of public favor. Therefore, people feel comfortable staking with it, as they trust that the blockchain will stay in a well-regarded position.
Disadvantages of Staking Ethereum
With all of this being said, there are some definite faults with Ethereum staking, which lead people to go elsewhere.
Staking is New for Ethereum
Despite how trusted the Ethereum network is, it cannot be denied that staking is a new feature of the blockchain. This means that it could be more vulnerable to hacks and exploits compared to chains that started with a proof-of-stake model.
The Best Returns Require 32 ETH
To get the highest percentage of returns, you need to be a full node validator. This means you need to manage a node yourself and lock away 32 ETH. This can be an expensive investment for many. While you can still make a decent return with pooled staking, you will never make as much as somebody acting solo.
Staking Requires Trust In the Architecture
While centralized services, such as savings accounts, require you to trust a third party, there is still a trust-factor involved with staking. You need to believe that the Ethereum blockchain is sturdy, secure, and will not falter. While it is commonly said in the world of DeFi that “in code we trust”, there is nothing that inherently makes technology more trustworthy than humans.
Tech is made by people, and so you still implicitly place your trust in people when you use networks like Ethereum. While this blockchain has a great track record, it is still fallible, and could break or malfunction at times.
Should You Stake Ethereum?
There is no easy answer to this, but if you are somebody who is interested in supporting the Ethereum ecosystem, and you would like to become a meaningful part of it whilst also earning a passive income, then you should absolutely consider staking. It is both financially and socially rewarding, as it helps to keep the blockchain functional.
However, if you are more focused on earning a passive income, and are not particularly interested in actively maintaining the network, then there may be better options out there. For instance, Ledn’s Growth Accounts offer up to 4% APY, which is higher than you can currently make with Ethereum staking.
Of course, both options come with risks. In particular, they share the same issue of being prone to ETH’s volatility, meaning that your assets could rapidly lose value. Keep this in mind, and consider the risks and disadvantages of staking before you make up your mind.
Conclusion
Ethereum staking is a fascinating activity. Not only can you earn crypto, but you can help support the network. With that being said, there are drawbacks to this method that you need to keep in mind. Alongside this, there are other methods out there where you can earn more for your ETH holdings, such as Ledn’s Growth Accounts. Make sure to critically consider all of your options before jumping in with any– that way you stay informed and strategic about your finances.
This article is sponsored by 21 Technologies Inc. and/or its subsidiaries (“Ledn”) and is for general information, discussion, or educational purposes only and is not to be construed or relied upon as constituting legal, financial, investment, accounting, tax, estate-planning, or other professional advice or recommendation. Please read Ledn’s full Risk Disclosure Statement and Disclaimers.
