A decentralized blockchain-based platform, Ethereum creates a peer-to-peer (P2P) network that securely executes smart contracts. Participants can use these smart contracts to transact with one another without an intermediary. Ether (ETH) is Ethereum’s native cryptocurrency.
In this comprehensive guide, we explain how to stake Ethereum and why you might want to participate in this activity, as well as describe the key requirements and more.
What is Ethereum Staking?
Ethereum staking means participating in validating transactions on the Ethereum blockchain network. With Ethereum staking, users lock-in or “stake” ETH on the blockchain to earn validator privileges to help secure the network, earning rewards in the process.
Proof of Work (PoW) vs. Proof of Stake (PoS)
PoW, which requires cryptocurrency mining to operate, entails miners competing with each other to solve complex mathematical puzzles to earn block rewards.
PoS, which requires cryptocurrency staking to operate, employs validators selected at random to ensure the reliability of the transactions, paying them with cryptocurrency in exchange.
In 2022, Ethereum switched its consensus mechanism from a PoW protocol to a PoS protocol because it’s a more energy-efficient, secure way of validating transactions and adding new blocks to the blockchain.
Why Stake Ethereum?
There are many benefits to Ethereum staking, including:
Earning Rewards: With Ethereum staking, you earn more ETH because you’re contributing to the security of the Ethereum network because the network gets stronger as more ETH is staked. How much you earn hinges on how much ETH you stake and how long you stake it for.
Providing Sustainability: Staking Ethereum is a more environmentally friendly method to earn ETH staking rewards from crypto than mining. That’s because stakers aren’t required to complete complex PoW computations to participate in securing the network. And as such, stakers don’t need to use energy-intensive hardware.
What You Need to Begin Staking Ethereum
If you opt for staking Ethereum solo, you’re required to stake at least 32 ETH to become a full validator for Ethereum.
You’ll also have to set up your own staking node, run the software on your own hardware, and have a stable Internet connection so you can remain synced up with the network. With solo staking, you don’t have to provide any personal information to a third-party service provider.
However, if you choose pooled staking or staking as a service for staking Ethereum, you assign your staking rights to a service provider to handle the process for you.
With either of these two methods, you’ll likely have to set up an account with the third-party provider, provide your personal information, or have a minimum balance.
The personal information you may need to submit to third-party service providers includes:
- Your full legal name
- Date of birth
- Physical address or email
- Telephone number
- Government-issued ID, e.g., driver’s license or passport
Organizations need this information to ensure they’re in compliance with the Know Your Customers investment industry standard. This standard ensures that financial advisors are able to verify their customers’ identities, understand the nature of their investment activities, and also ensure that their clients’ funds derive from legitimate sources.
If you’re participating in Ethereum staking solo, you need to deposit at least 32 ETH to run a validator node on the Ethereum network.
But if you’ve opted for pooled staking or staking as a service, you may not be required to deposit a specific amount. That’s because the deposit amount differs depending on the wallet service or exchange you use.
Some wallets and exchanges don’t mandate that you make a minimum deposit; however, others may require a minimum deposit of as little as 0.1 ETH to 5 ETH worth of cryptocurrency.
How to Stake Ethereum
You’re probably wondering exactly how to stake Ethereum. Well, there are three main ways to stake Ethereum: solo staking, pooled staking, and staking as a service.
1. Solo staking
A solo staker is an individual validator on the Ethereum network. That means you’re required to deposit 32 ETH as well as run and maintain an Ethereum node connected to the Internet using your own hardware and software.
As a validator, you must have hardware and an Internet connection that’s strong enough to keep a node online continuously, or your ETH will be penalized.
Although staking Ethereum solo is a major responsibility, if you’re successful, you’ll reap rewards directly from the protocol rather than through third parties.
2. Pooled staking
In pooled staking, a number of individuals contribute to ETH together to meet the required 32 ETH deposit and activate a set of validator keys. Like staking as a service, pooled staking assigns the operations of a validator node to a third-party service provider, which can be done with a small amount of ETH.
Numerous staking pools give each of their users a liquidity token. This token functions as a receipt of the amount a user has staked, which the individual can use as collateral on decentralized finance applications.
Pooled staking is the least expensive way to begin ETH staking since many pools let you deposit any amount of ETH to stake and earn rewards. And if you join a staking pool, you’re not required to generate a validator key.
However, since several participants are involved under a single validator, you have to split the rewards, the value of which is typically less than the value of the rewards you earn using other staking methods.
3. Staking as a Service
Staking as a service refers to third-party service providers that run and maintain validator nodes on your behalf. But you’ll still have to make a minimum deposit of 32 ETH to activate a validator.
However, you will assign node operations to the SaaS providers, typically for a cut of the rewards you earn. This staking method is best if you want to stake Ethereum, but you don’t have the required knowledge or hardware to be a validator on your own.
Staking as a service mandates that you share your validator key with your service provider, which means you only have partial control over node operations and access to your funds. But it also means that you have a validator client that’s fully maintained by your service provider from which to earn staking rewards.
Staking via Cryptocurrency Exchanges
These are the steps you need to take to stake Ethereum via a cryptocurrency exchange.
- Sign up for an account on the crypto exchange. This usually means submitting your personal information, verifying your identity, and setting up a method to pay for your ETH.
- Buy the ETH, which you can usually do via a variety of payment methods offered by the exchange, e.g., credit/debit card or bank transfer
- Transfer the ETH to the staking program of the exchange. When the ETH is in your exchange’s wallet, look for the option to stake ETH within your wallet. While the steps may vary from one exchange to another, you’ll have to go to your wallet’s staking section and then follow the directions to stake your ETH.
- Select your staking parameters, such as how much ETH you want to stake and for how long.
- Start staking and reaping the rewards. How often the rewards will be added to your account depends on the particular staking program and its schedule for paying out rewards.
Types of Cryptocurrency Exchanges
1. Centralized Exchanges
Centralized exchanges (CEXs) make it easy for you to buy and sell crypto. CEXs, which run on centralized servers, require you to deposit funds into their wallets. You can stake Ethereum on Binance, KuCoin, Kraken, and Coinbase.
These exchanges are recognized for their user-friendly interfaces and high liquidity, as well as the ability to access a broad range of cryptocurrencies.
CEXs are highly regulated, and, as such, they offer top-notch security measures to protect the funds of their users. Since centralized exchanges can still be hacked, you’re trusting the exchange to ensure your funds are protected.
2. Decentralized Exchanges
Decentralized exchanges (DEXs), which run on decentralized networks, enable users to trade crypto with each other directly. Since they are non-custodial, you’re able to connect and transact with your decentralized wallet. Decentralized exchanges include PancakeSwap, dYdX, Uniswap, and Kyber.
These exchanges execute trades with smart contracts and give you more control over your funds. DEXs, however, have lower liquidity than CEXs, and their interfaces may also be less user-friendly. Decentralized exchanges are also subject to the limits of the blockchain networks they run on.
3. Hybrid Exchanges
Hybrid exchanges incorporate the benefits of CEXs and DEXs, meaning you can trade crypto on a centralized platform and execute trades on a decentralized network. This gives you higher liquidity and increased security and enables you to execute trades more quickly.
These exchanges also offer an interface that’s user-friendly, as well as advanced trading tools. But they’re still vulnerable to the risks associated with centralized exchanges, including hacking.
Best Cryptocurrency Exchanges
You need to consider a number of factors when you select an exchange, such as regulation, supported cryptocurrencies, and fees.
The following are some of the best crypto exchanges in the market:
Staking via a Wallet
Following these steps will help you understand how to stake ETH via a crypto wallet:
- Select a wallet that’s compatible with staking Ethereum, such as Trezor, Ledger, and MetaMask.
- Once you’ve chosen a wallet, you have to transfer ETH to it from another wallet or an exchange.
- When the ETH is in your wallet, go to your wallet’s staking section. You may have to click on a certain tab or button within the interface of the wallet.
- Then follow the directions the wallet provides to stake your ETH.
Types of Crypto Wallets
A cryptocurrency wallet is a software service or hardware device that stores, sends, and receives crypto. In other words, it allows you to access your cryptocurrency coins that exist on a blockchain.
Crypto wallets aren’t the same as digital wallets, such as Cash App, PayPal, and Apple Pay, which are stored on smartphones and are connected to traditional bank accounts and credit cards.
The different types of crypto wallets include:
Custodial wallets: These crypto wallets, which are typically associated with crypto exchanges, operate much like banks. It’s important to understand that the company that provides the custodial wallet is responsible for protecting and managing your private key, such as your crypto bank account number. This enables you to easily log in and immediately start buying and trading crypto. And while it’s not up to you to protect your account, you can lose funds if the company is hacked.
Non-Custodial (or Self-Custody) Wallets: With this type of wallet, you have total control over your account. Even though you can download the crypto wallet company’s software or service, only you can access your private key. Non-custodial wallets are more secure and more private, but it’s up to you to keep your private key secure.
Cold Wallets: These hardware wallets store digital assets and crypto offline. They’re usually considered the most secure because they store your funds offline, where they can’t be hacked.
Hot Wallets: These software-based wallets, which include desktop wallets, web wallets, and mobile wallets, are connected to the Internet. As such, you can access your crypto assets quickly. However, since these wallets are accessible online, they’re more vulnerable to hacking.
Best Crypto Wallets
Here’s a quick overview of six of the best crypto wallets:
More Things to Know
Here is some additional information about staking Ethereum.
As an Ethereum staker, you can withdraw your rewards or principal deposit from your validator balance.
A validator who doesn’t fulfill their assigned duties receives a penalty, which means they lose a small amount of stake.
A severe penalty, slashing can cause a validator to be removed from the network in addition to losing their staked Ethereum. Validators can be slashed for:
- Proposing and signing two different blocks for the same slot.
- Attesting to a block that “surrounds” another one.
- Double voting by attesting to two candidates for the same block.
Is Ethereum Staking Profitable?
While it’s not exactly a get-rich-quick proposition, it can be profitable. However, the profits you earn from staking Ethereum depend on a number of factors, including:
- How much ETH you stake.
- The length of the staking period.
- What staking method you use.
- The current market conditions.
- The staking rewards the network validators offer.
You also have to consider your costs. It’s true that operating an Ethereum node can be rewarding and profitable, but it also necessitates a major initial investment as well as ongoing costs for maintenance.
Consequently, it’s critical that you thoroughly consider the hardware requirements, storage capacity, location services, network connectivity, and the costs involved in operating an Ethereum node before you set one up.
If you want to maximize your profits from staking rewards without spending a lot on expensive hardware and/or technical expertise, you might want to consider third-party service providers. These vendors can offer you cost-effective solutions so you can participate in the network while earning some passive income.
Risks and Challenges of Staking Ethereum
Staking Ethereum comes with some risks and challenges, including:
Even stable cryptocurrencies are subject to market fluctuations, which can drastically affect your staking rewards. For instance, if you opt to stake ETH and the price drops, your rewards from staking might not offset the loss.
Limited Access to Your Cryptocurrency
If you’re not specifically participating in liquid staking, your liquidity is effectively locked up for a certain length of time, which means you won’t have immediate access to your funds. This can be an issue if you’re dealing with market volatility or uncertainty.
The Need to Trust Your Staking Platform
The main risk of staking ETH is the platform you select. While solo staking is generally considered safe, the other staking methods come with their own risks.
For example, pooled staking uses smart contracts, which hackers could exploit if there are bugs in those contracts. That’s why it’s essential to carefully research the platforms and select one that focuses on the features that align with your investment goals and the amount of risk you’re willing to accept.
To find their way around the staking process likely requires users to have some technical knowledge. However, not all users will have that knowledge, which will limit participation.
Requirements for Validator Activation
A minimum of 32 ETH is typically required to activate a validator, potentially limiting entry for some people.
The Future of Ethereum Staking
With the ongoing advancements and developments in the Ethereum ecosystem, the future of Ethereum staking appears bright, with new use cases and platforms catering to institutional investors and decentralized finance (DeFi) users.
In addition, as more users participate in Ethereum staking, there may be more competition among validators, potentially leading to adjustments in staking rewards. As the value of ETH rises and the demand for staking increases, there may be more chances for users to earn higher passive income from staking.
As the demand for staking Ethereum grows, staking service providers may emerge that will offer customized solutions for different types of users. These solutions may include such features as improved security processes and personalized support to help users generate more passive income.
Staking Ethereum for passive income can be profitable for cryptocurrency investors. However, while staking Ethereum is exciting, it’s critical that you do your own research. This will enable you to make better choices and potentially avoid costly errors.
Our guide will help you understand what’s involved in the process of staking Ethereum so you can make an informed decision about whether it’s right for you.