Different Ways to Stake Ethereum

Key Takeaways

Blockchain networks rely on consensus mechanisms to maintain security and validate transactions. The two most common consensus mechanisms being Proof of Work (PoW) which is used by Bitcoin, and Proof of Stake (PoS), which is used by the Ethereum network among others. Proof of stake allows anyone to stake their Ether (ETH), and earn passive income for participating in the network’s security.

However, with multiple options and some technical questions, it can be hard to know how to start. Whether you’re a beginner or a more advanced crypto investor, understanding how to stake Ethereum will help you make informed staking decisions to grow your crypto portfolio. This article looks at various staking approaches, from self-staking to pooled solutions, and describes how to become an Ethereum validator.

What Is Staking Ethereum?

Ethereum staking involves freezing a specific amount of ETH on the Ethereum protocol to support the security of the blockchain. This staked crypto acts as collateral for validator nodes. It enables them to securely participate in the network’s consensus process, with their staked assets incentivizing them to behave well.

• When you stake Ethereum, you lock your ETH directly on the network, committing it to the system. 
• All staked ETH functions as collateral for a specific validator node. With “skin in the game”, validators can be trusted to participate honestly in processing new blocks of transactions to the blockchain.
• Validators are rewarded for their efforts, and the rewards are shared among the individuals who staked collateral for that node.

As the industry has grown and evolved, the term staking has evolved to include various different levels of interaction with this core process. Now, staking can also refer to intermediary services, which we’ll tackle in more detail below. For now, let’s start with an explanation of two key concepts central to staking.

Validator Nodes

Validator nodes are the foundation of staking. They run unique software that allows them to validate new blocks of transactions, and receive rewards directly from the network for doing so. These rewards are the foundation of the entire staking industry.

Slashing

Users wishing to become validators must deposit 32 ETH into the deposit contract, which acts as collateral. The network will automatically deduct some of this ETH for any infraction, malicious act or simple bad practice detrimental to the network. This is known as slashing, and its objective is to incentivize nodes to perform optimally.

How To Stake Ethereum

There are several methods for staking Ethereum, each differing in cost, reward structure, and level of involvement. The four main options are:

• Solo staking
• Pooled staking
• Staking-as-a-Service
• CEX staking

Solo Staking

Solo staking means running your own validator node independently. The node stores data, validates transactions, and adds new blocks to the blockchain. As a solo validator, you’ll completely control your operation. You’ll also hold the private keys to your Ethereum validator wallet directly, meaning you’ll never need to trust an intermediary with them. You’ll also keep 100% of the staking rewards you earn. So this staking option offers the maximum in terms of control and rewards.

But there are limitations to solo staking too. For a start, validators need to be able to commit at least 32 ETH (around $80,000 at the time of writing) to the network up front. This significant sum excludes many people from getting involved. And solo staking also requires technical skills to maintain continuous availability and avoid slashing penalties. Finally, solo staking involves running expenses such as power supply and of course the equipment itself. 

To summarize this method:

1. Who runs it? You run the validator node.
2. Custody: You maintain complete control over the ETH in your validator wallet.
3. Rewards/Fees: You earn all the rewards but must cover operational costs like hardware and energy.
4. Security: You’re responsible for the node’s security. Failure to operate correctly may result in slashing penalties.

Pooled Staking

Pooled staking allows users to participate in Ethereum staking without committing the 32 ETH individually. Through a pool, stakers can invest as little as 0. Participants collectively contribute 32 ETH or 1 ETH each, based on the experiment’s outcome. 

The network distributes the staking rewards to the participants, although the pool operator typically takes a commission. This method lowers the technical and financial risks of staking, enabling users to receive rewards regularly. However, it also involves relying on the pool’s smart contract and operational approach. 

1. Who runs it? A pool operator runs the node.
2. Custody: The platform pools your ETH with other participants.
3. Rewards/Fees: Rewards are distributed proportionally, minus any fees the pool operator charges.
4. Security: The pool operator manages the node security. 

Staking-As-A-Service (SaaS)

Staking-as-a-Service (SaaS) provides a practical option for Ethereum owners who prefer to avoid managing the hardware or software required for staking. By staking your ETH with a validator operated by a service provider, you can earn staking rewards while avoiding the complications of running a validator node. 

The SaaS approach allows you to participate in the staking process through a third party, ensuring that the provider handles the technical aspects. The service usually entails strict security features and professional handling of the assets to guarantee their safety and enhance staking.

However, there are downsides to consider.

Service providers charge fees that will reduce your overall staking rewards. Using an intermediary also introduces the question of trust: you must trust the provider to manage your rewards securely, and to operate the node reliably. Lastly, while SaaS eliminates the need to run your own equipment, you are still required to provide the full 32 ETH to start staking—outsourcing only the technical operations.

To summarize SaaS:

1. Who runs it? A third-party provider operates the validator.
2. Custody: You will have your own validator keys, however they will need to be shared with the operator.
3. Rewards/Fees: You split the earnings with the service provider, who takes a cut for overseeing the validator.
4. Security: This depends on the credibility of the service provider.

CEX Staking

Centralized exchanges like Coinbase, Binance, and Kraken provide an easy way to stake Ethereum directly through their platforms. With no minimum staking requirements, users simply deposit ETH and choose to stake. And there’s also no need to interact with smart contracts or deal with private keys – the exchange takes care of this for you. This makes it very accessible for users of all means and technical abilities to earn passive staking income.

However, there are of course some drawbacks too. You must deposit your ETH into a wallet controlled by the exchange, meaning you won’t be in custody of your staked crypto. The rewards are also lower: as a service provider, the exchange charges fees, and of course you’ll only earn a small fraction of the rewards, since you’re sharing with a pool of other contributors. So this method offers lower returns but greater convenience.

1. Who runs it? The validator operates the centralized exchange.
2. Custody: The exchange takes the custody of your ETH.
3. Rewards/Fees: Rewards are lower because the exchange charges very high fees for the transaction.
4. Security: You depend on the exchange’s security measures, which can be dangerous if hackers infiltrate the exchange.

Different Types of Ethereum Staking Compared

There are several ways to stake your ETH, each with its own advantages and disadvantages. Let’s explore the different types of Ethereum staking:

Benefits of Ethereum Staking

There’s a lot to gain from Ethereum staking, including: 

• Earning passive income
• Supporting network security
• Diversifying income
• Participating in decentralization

Let’s discuss them in detail below. 

Earning Passive Income

Staking your Ethereum is like putting money in a savings account because you get paid even more ETH. These rewards come from the network fees and new block issuance, which means that staking is a low-input passive income.

Earnings also vary depending on your approach; solo staking gives higher profits than pooled or exchange staking, which is more manageable. Staking improves value appreciation and fortifies the network.

Supporting Network Security

Staking ETH increases the network’s security by making it harder for malicious actors to launch successful attacks. When more participants stake ETH, the network becomes more resistant to centralized attempts. To compromise the network, an attacker would need to control most of the ETH staked, which requires substantial resources.

The security mechanism is straightforward: the more participants stake ETH, the higher the amount needed to override the system’s consensus. Therefore, staking supports network operations and fortifies its defense against attacks. As the network grows stronger through increased staking, it becomes less susceptible to malicious parties controlling it.

Diversification of Income

Staking ETH on Ethereum is an alternative way to earn income. ETH holders earn rewards in the form of additional ETH through staking. Staking creates a steady income stream from the ETH that would otherwise be idle. Instead of merely holding ETH and hoping its value will increase, users who stake their ETH actively contribute to network security and earn rewards.

Staking assists investors in spreading their income sources, reducing the risk associated with high volatility. Staking is generally less risky, and the returns are more stable than other investments, making it ideal for long-term gains.

Participation in Decentralization

Staking ETH is a straightforward way for ETH holders to participate in decentralization. When users stake their ETH, they contribute to the network’s security and operations by validating transactions and creating new blocks. It also helps decentralize the control of the network, which is essential for maintaining its integrity and resistance to manipulation.

Staking alone is also vital in Ethereum decentralization, as it helps protect and distribute the network. When staking independently, solo stakers run the validators, eliminating central points of failure that could be vulnerable to attacks.

Risks of Ethereum Staking

While staking Ethereum has its benefits, it also has its risks. ETH stakers must consider the following before committing their assets: 

• Slashing
• Liquidity risks
• Custodial risks
• Smart contract risks

Let’s discuss these disadvantages that may lead to loss of funds.

Slashing Risks

Slashing refers to penalties imposed on validators who violate specific rules, reducing their staked ETH. 

Slashing risks occur when a validator fails to adhere to protocol rules. It may include actions like:

1. Surround Vote Violation: A validator votes for a block with conflicting votes, contradicting the blockchain’s history.
2. Proposing or Confirming Fraudulent Blocks: Validators who propose or confirm blocks that don’t meet protocol standards face slashing penalties.
3. Coordinated Attacks: If multiple validators violate the rules simultaneously, the penalty for each validator increases to deter large-scale attacks.

Slashed validators are removed from the active set and placed in an exit queue for about 36 days. During this time, they incur a penalty for each missed epoch. In severe cases, the penalty could result in the complete loss of the validator’s staked ETH.

Liquidity Risk

Liquidity risk in Ethereum staking occurs because your ETH remains locked during the staking period, making it unavailable for trading or sale. When you stake your Ethereum, you commit it to the network for a set period. You cannot sell or trade your ETH during this time. If the price of Ethereum increases while your ETH is locked, you’ll miss out on the potential profits.

Moreover, Ethereum’s market volatility may cause you to miss potential profits or limit your ability to react to sudden drops in value. 

Custodial Risks

Staking through centralized exchanges or pooled platforms involves the risk of losing your funds to a third party as you delegate control of your assets. It becomes dangerous if the custodian company declares bankruptcy or mishandles the funds, as with FTX. 

Additionally, centralized services retain control of your private keys, which increases vulnerability to hacking or security breaches. Users may also face penalties if the service violates network rules, such as through validator misconduct.

Smart Contract Vulnerability

Pooled staking relies heavily on smart contracts, which may contain flaws that pose high risks, such as fund loss. These flaws can include poor coding standards, issues with business logic, or insufficient security measures, leaving the smart contract open to exploitation by attackers. 

Even minor bugs can lead to critical consequences, such as unauthorized fund withdrawals or manipulation of staking functionalities. Regular audits and secure platforms are essential to reducing these risks.

How To Set up an Ethereum Validator Node Yourself

If you’re interested in setting up your own Ethereum validator node, follow these steps:

• Choose an Ethereum Client

You should begin by choosing and installing an Ethereum client. Some of the most commonly used software are Prysm, Lighthouse, Teku, and Nimbus. 

These clients enable your validator node to interact with the Ethereum network. Every client has its own installation and configuration guide; you should select one appropriate for your level of computer literacy.

• Generate Validator Keys

After that, you must generate validator keys once your Ethereum client runs. These keys enable you to approve new blocks and be involved in the consensus. Create these keys with the help of tools issued by the Ethereum Foundation or your client software.

• Deposit 32 ETH

To become a validator, you need to stake 32 ETH into the Ethereum 2. 0 deposit contract. This deposit ensures that validators are not dishonest.

Be very careful when depositing. Any mistake you make will cost you your money or delay your deposit.

• Maintain 24/7 Uptime

Validator nodes must always be on and monitored, so running one is time-consuming. Validators must always be online to prevent penalties such as slashing and loss of rewards. 

Ensure your system is maintained well with backup power and internet solutions to avoid interruption.

What Is Restaking?

Restaking is a relatively new concept in the cryptocurrency industry. It allows stakers to use their already staked assets, like ETH, to stake on additional networks or protocols without needing to unstake or withdraw the original stake. In simple terms, restaking extends the Proof of Stake (PoS) mechanism by enabling users to use the same assets across multiple networks at once.

For example, suppose you have staked 32 ETH as an Ethereum validator. Restaking lets you apply that same ETH to support other protocols or blockchains, such as a layer-2 solution or a DeFi platform. This approach allows stakers to earn from multiple sources, increasing potential returns. However, this added opportunity also brings added complexity.

Restaking presents additional risks. Since you are committing the same assets to more than one protocol, you become vulnerable to issues across multiple systems. If one network experiences slashing events, which penalize misbehavior or downtime, your entire stake across all networks could be in danger. Similarly, failures in secondary protocols could reduce your rewards or even lead to losses.

Restaking is still in its early stages and has yet to be widely adopted. However, as Ethereum and other PoS networks grow, restaking may develop into a reliable staking strategy, creating more revenue streams from their staked assets. While it could increase rewards, stakers must balance these benefits with understanding the risks and the need to monitor all the processes involved closely.

Closing Thoughts

Staking Ethereum offers potential rewards and contributes to network security. However, it involves risks, including the possibility of losing funds due to validator misbehavior or platform issues. Choose a staking method that aligns with your technical skills, risk tolerance, and desired returns.

FAQs 

Can I Mine Ethereum?

You can no longer mine Ethereum. In 2022, Ethereum transitioned from the Proof of Work (PoW) consensus algorithm to Proof of Stake (PoS) through an upgrade called Ethereum 2 or The Merge. Previously, PoW required miners to solve complex mathematical problems to verify transactions, but this is no longer true. Validators now maintain the network by staking ETH.

Is Ethereum Staking Profitable?

Ethereum staking can be profitable, but several factors influence the potential returns. The size of your stake, network conditions, the method of staking (solo, pooled, SaaS, or exchange), and fees all play a role. Staking rewards fluctuate based on the total amount of ETH staked across the network and the overall demand for network security. While solo staking offers higher rewards, pooled and centralized options can still be profitable but come with more fees and slightly lower returns.