Staking is one of the popular investment types for generating income from Ethereum. It involves locking up ETH assets for a certain period of time in order to receive rewards, often in ETH as well. Today's article from Notum will give you a detailed information about what Ethereum staking is, its main types, how it works, and will also draw attention to the advantages and disadvantages of this investment type.
What Is Ethereum Staking?
Important! Staking is the process of locking digital assets in order to receive rewards available to PoS cryptocurrencies.
Ethereum staking is one of the ways to generate rewards from ETH assets by locking them for a certain time. Previously, Ethereum operated on a proof-of-work consensus mechanism, where miners played an important role by solving complex mathematical problems to validate transactions. However, since Ethereum switched to proof-of-stake, its network needs users to stake ETH and contribute to the ecosystem.
Important! Staking is an integral part of the Ethereum network, since users staking ETH influence the security of the network, ensuring its overall safety and proper functioning.
Source: Ethereum
With traditional staking services, users are required to lock their crypto for a certain period of time without being able to use it. However, with new investment types such as liquid staking and restaking, ETH owners can stake their cryptocurrency, use it in DeFi ecosystem, as well as receive ETH staking rewards. More information about liquid staking can be found here.
Interesting fact! Ethereum staking is a good investment option as it does not require active management and brings decent passive income.
How Does Ethereum Staking Work?
So, how does Ethereum staking work? How to stake Ethereum? Should i stake Ethereum? Let’s find out.
If you are an experienced crypto investor with a capital of 32 ETH, you can pay attention to Ethereum on-chain staking. After creating a staking node, you become a validator who combines transactions into blocks on the execution layer, pays attention to other validators and ensures the fairness of transactions. For operating as validators, the network rewards solo stakers with validator rewards.
Interesting fact! Ethereum itself calls this option "solo home staking" and draws attention to its advantages, namely receiving full participation rewards, as well as the absence of the need to trust anyone with your funds.
If you, like most ETH holders, don’t have 32 ETH to activate your own validator or don’t want to trust others with your assets, there are several options:
- Staking as a service. If you do have 32 ETH but don’t want to deal with hardware, staking-as-a-service might be a good solution. The SaaS option allows you to delegate the hard part while still earning native block rewards. To stake ETH this way, you need to create validator credentials, upload your signing keys, and also deposit 32 ETH, while the service will do the rest.
- Pooled staking. If you don’t have 32 ETH or don’t feel safe staking that much, you might want to consider pooling solutions. Pool is a simpler alternative to staking that allows you to stake any amount of ETH and earn ETH staking yield. Pools also includes ’liquid staking’ and a token representing your staked ETH.
- Centralized exchanges. If you don’t want to keep your ETH in your wallet, you can use staking services from CEXs, which allow you to earn income with minimal effort. However, the official Ethereum website says that this method may be unsafe for the network and affect its decentralization.
Pros of Staking Ethereum
Ethereum staking is a good investment option since it offers token holders the following benefits:
- Rewards. If you own ETH, staking can be a great way to earn passive income without actively managing your assets. Moreover, now you don’t need to own 32 ETH to participate in staking activities, any amount is enough to invest in pooling options. Thus, if you are interested in how to earn Ethereum, staking can be a nice option.
- Improved security. Staking protects the network from malicious behavior. So, the more people stake their ETH assets, the stronger it becomes and the easier it is for Ethereum to survive potential attacks.
- Decentralization and sustainability. The more validators participate in the process, the more decentralized Ethereum is. A large number of validators ensures that power is not in the hands of one person, and accordingly makes Ethereum more sustainable.
- Energy consumption. The transition of Ethereum to PoS also has a positive effect on the environment, since, unlike PoW, it requires much less computing power and energy than mining.
Cons and Potential Risks of Staking Ethereum
However, despite the significant benefits, Ethereum staking also comes with some risks and disadvantages that are important to consider before you start investing.
Lock-Up Periods and Liquidity
As known, traditional staking requires locking a certain amount of ETH in a smart contract. Thus, ETH holders will not be able to use the asset in other DeFi activities until it is withdrawn from the staking contract.
Important! If the Ethereum network experiences problems or the value of ETH drops, stakers can face loss of funds and rewards until the lock period ends.
Technical Risks and Slashing
Ethereum validators must act honestly and follow the rules of the network, otherwise any malicious action can lead to slashing penalties and the part of the validator’s staked ETH being burned. Moreover, network issues such as validator downtime can also lead to penalties or slashing, resulting in partial fund loss.
Besides, it is important to pay attention to the technical risks associated with Ethereum staking, such as potential bugs or vulnerabilities in the staking software and smart contracts. Any of these errors can lead to the loss of staked funds or reward decrease.
Market Volatility
Market volatility can also be quite risky for ETH staking, since token’s value can fluctuate significantly, affecting the staking returns. Therefore, if the value of ETH drops while staking, it can significantly impact your returns.
During periods of high volatility, the potential benefits of staking can be offset by a sharp drop in the market price of ETH. Additionally, sudden price drops can result in losses that outweigh the benefits of staking.
How to Stake Ethereum on Notum
Notum is a platform that allows users to monitor the DeFi market, as well as find profitable yield opportunities and invest in any asset with one-click. Moreover, Notum App combines various investment opportunities that let users earn high rewards.
By visiting the Yield Explorer tab and selecting ETH in the "Select Asset» filter, you will see a huge number of options with different ETH variations, such as wrapped, staked and etc. For example, Notum offers liquid staking of RETH with a total APY of 2.64%, RSETH liquid restaking with a total APY of 5.16% and many other options. All options including Ethereum on Notum can be explored here.
Source: Notum
Important! Using Swap on Notum App, users can receive the required version of ETH, which can then be used in the chosen strategy, for example Pooled staking.
Source: Notum
Factors to Consider
Before you answer the question should you stake Ethereum or not, it is important to keep in mind a number of factors that will directly affect your rewards. One of them is choosing the best place to stake eth that offers a user-friendly interface and the highest staking rewards. The options worth considering are Lido, Coinbase, Kraken, and others. Compare which platform has the best rates (pay attention to ETH staking rate and Ethereum APY), as well as their functionality, criteria, rewards, etc., and then choose the one that suits you.
Source: Kraken
Important! Some platforms even offer a reward calculator to help investors understand how much they will receive for staking their ETH.
Another important factor is the type of staking you choose - traditional staking, liquid staking, liquid restaking, etc., as each of them has its own characteristics, benefits, eligibility requirements, and more. While traditional staking requires you to lock funds, liquid staking allows you to use tokens in the DeFi space. Learn the pros and cons of each option before investing.
The duration of staking and the amount of ETH staked also play a big role, as more Ethereum and a longer lock period will often bring more profit.