This exclusive guide about Ethereum staking explains all options you have to earn some additional ETH tokens when staking ETH.
If you want to understand what exactly is Ethereum staking, then you should understand what is Proof-of-Stake (PoS) and how it works. PoS is a consensus algorithm that allows blockchain networks to reach consensus.
The most popular consensus mechanisms in the cryptocurrency market are Proof-of-Work (PoW) and Proof-of-Stake (PoS). Bitcoin (BTC), for example, is working with a PoW consensus algorithm. Ethereum now is moving from Proof-of-Work to Proof-of-Stake.
While the PoW consensus algorithm uses large amounts of energy to validate transactions, PoS allows the network to become more efficient. That means that PoS would not require a large amount of energy but it will also help the network to reach consensus. The consensus in PoS networks is going to be through the wealth you hold (staking).
The network will select those accounts with the largest staking to process transactions. In general, PoS networks assign probabilities to holders. If you hold 2% of the funds of the network, then, you should theoretically be able to mine 2% of the blocks of that blockchain.
Cryptocurrency stakers are rewarded for their work mostly by crypto dividends. The rewards are distributed according to the mining fees paid by users processing transactions and block rewards.
Can You Stake Ethereum?
In recent years, people have been talking about staking ethereum or ethereum staking. Until now, if you wanted to stake Ethereum, this was an impossible task. Ethereum was born as PoW network that didn’t allow users to stake coins.
Ethereum was working as a normal PoW blockchain network that required users to process transactions with mining hardware. Nonetheless, the first version of Ethereum 2.0 (ETH 2.0) has been launched on December 1st.
Nowadays, it is possible to mine Ethereum by depositing 32 ETH to activate validator software. Users will be in charge of processing transactions, keeping network data safe and finding new blocks.
In this way, users that stake Ethereum will be able to earn rewards and protect the second-largest blockchain network in the world. This is a new way users have to get access to the network. Moreover, they can engage with the whole Ethereum ecosystem by participating in the PoS consensus algorithm.
Ethereum staking comes at a cost
However, staking Ethereum is not risk-free. There are some things you need to take into consideration before investing your 32 ETH. These risks will be analyzed in the next sections.
Those that want to participate in Ethereum staking are facing some heavy hardware requirements. Not everyone is able to become a validator in the network or join a staking pool. Nevertheless, these requirements are relatively easy to meet and would help you to be an active member of the Ethereum blockchain.
Staking pools work in a similar way as mining pools. A large number of users gather their funds together to be able to get higher rewards as a group. This became a very popular thing to do after the expansion of the crypto market in 2017.
What is the Difference Between ETH 2.0 and ETH?
There are some differences between ETH 2.0 and ETH. The first thing we need to know is that Ethereum (without the 2.0) makes reference to the Proof-of-Work network. Meanwhile, Ethereum 2.0 is the new PoS blockchain network that has been released on December 1st.
The second thing we need to have in mind is that the Ethereum network had some scalability issues. If you remember back in 2017, when the crypto market was experiencing the Initial Coin Offering (ICO) boom, the Ethereum network was very congested.
Users that wanted to perform a single transfer on Ethereum had to wait for several hours – if not days – for the transfer to be completed. Moreover, transfer fees were very high. This happened because blocks were full of transactions and there was no space to process them all.
With Ethereum 2.0, this issue should be solved. The network aims at addressing the lack of scalability and security on the Ethereum network we all knew. By switching to ETH 2.0 and a PoS consensus algorithm, the network becomes now more efficient. In this way, Ethereum will be able to avoid (or substantially reduce) bottlenecks. Additionally, transfers are going to be faster and cheaper.
Although Ethereum 2.0 is a very important upgrade, it would need some time to be completed. The first phase has already been launched on December 1st, 2020. Nonetheless, there are many other improvements that must be done before the official ETH 2.0 network is finally deployed.
While the Ethereum 1.0 network can process 15 transactions per second (tps), Ethereum is able to process 100,000 tps. This can be done by activating the so-called shard chains. Thus, this shows a significant improvement in the performance of this network.
At the moment, the PoW and the PoS Ethereum networks are working together. This is expected to reduce any issues that could appear. Moreover, this will protect data integrity and the Ethereum blockchain will continue to run smoothly.
During 2021, the goal is to release 64 shards. That would allow Ethereum to improve its performance by 64 times. The second phase is going to be launched at the end of 2021 or the beginning of 2022. The goal is to make the network fully compatible with smart contracts.
If you didn’t know, the new Staking chain for ethereum is called beacon chain.
How to Stake Ethereum?
There are different ways to become an Ethereum validator (aka, stake Ethereum). Firstly, you will need the 32 ETH we talked about previously. This is going to be important if you are staking on your own. If you are a crypto enthusiast that has the technical knowledge to do solo staking, then this is the best option for you.
As a solo validator, you will need to use the ETH2 launchpad. This is an application that will guide you throughout the staking setup. If you do not know how to do something, the ETH2 launchpad will help you.
Considering that as a solo miner with just 32 ETH staked would have a hard time to process a block with transactions, you can join a mining pool. You would need an operating system with 64-bit Linux, a Mac OS X 10.14 or newer or a Windows 64-bit.
It would be ideal to have a processor Intel Core i5-760 or an AMD FX-8100. If you are able to have a better system, then your staking would become much stable. You would also need a memory of 8GB RAM and a storage of 2TB(!) with available space SSD. Most of the computers that are currently being sold in the market would be able to run a validator.
Ethereum Staking Hardware Requirements
Below is the table a summary of all the needed specifications in case you want to stake Ethereum from a laptop or desktop PC. Also, in case you’re not sure if 24/7 internet/WIFI is guaranteed, you might consider running a VPS in the cloud.
|Operating System||Linux / MAC OS X / Windows(64-BIT)|
|CPU||Intel Core i5-760 / AMD FX-8100|
|RAM||8GB – 16GB|
Take into consideration that if you want to do solo Ethereum staking, you will need to download a copy of the Ethereum blockchain. This is, running an ETH 2 client. Once you have set up all the things, you will be able to send the 32 ETH to the staking deposit contract. This is a very important thing to do and that we recommend you to check carefully. Sending the funds to a wrong Ethereum deposit address could result in losing all your funds. This can be considered one of the risk if you want to stake Ethereum.
Nonetheless, users can also stake Ethereum by using third-party platforms such as exchanges. Several cryptocurrency exchanges like Binance or Coinbase are allowing users to stake virtual currencies. With these platforms, the minimum requirement of 32 ETH does not apply. You will have the possibility to stake Ethereum with much lower amounts.
In addition to it, you will be able to receive the rewards on your exchange wallet in just a few simple steps. This is a great way to start staking Ethereum and understand how the new network works.
How Much Can I Earn with Staking Ethereum?
As the Ethereum 2.0 network is already here, users are wondering which are the staking rewards. Some reports are showing that users are making, on average, around 0.00403 ETH per day. At the time of writing, this is equal to $2.34. That would represent a yield of over 4.5% annualized. Other sources claim that staking Ethereum would give an estimated reward of 6.5% per year.
There are some reports that show that it may be possible for users to earn between 5% to 17% on their ETH per year. That’s certainly a higher yield than 4.5% or 6%. However, this is not clear and we will have to wait for more information to be released on that matter.
Reduction in Ethereum staking rewards over time
Unfortunately for many users, this number is expected to be much lower in the future. The reason behind this reduction in staking rewards is the number of validators. The larger the community of validators, the lower the rewards are expected to be if fees on the Ethereum networks remain the same.
There is a small possibility that the Ethereum price would be so high that rewards will be greater. Even if there is an increase in the number of validators, a larger price of ETH could mean that rewards will be higher. Nonetheless, this remains just a possibility. Taking into consideration the evolution of blockchain networks in the past years, we see that if the network is successful, there is usually going to be a larger number of validators.
Staking Ethereum on Coinbase
Coinbase, one of the largest exchanges in the cryptocurrency market, announced that they are beginning a new multi-year upgrade to Ethereum 2.0. With Coinbase, users will have the possibility to convert their ETH accounts to ETH2 and start earning rewards.
Starting in early 2021, Coinbase will be communicating how to start staking on its platform. Users will be able to get access to the beacon network and participate from Ethereum staking. More details are expected to be released in the near future.
Although it is currently not clear how Coinbase is planning to support staking for Ethereum, it is one of the first exchanges to announce they are working on it.
Coinbase users would possibly have to verify their identities if they want to stake on ETH 2.0. Moreover, users will need to have the eligible cryptocurrency on Coinbase.com rather than Coinbase Pro. Furthermore, users will have to accept the exchange Terms and Conditions for staking.
What are the Main Risks of Staking Ethereum?
Of course, staking Ethereum is not risk-free. Indeed, there are several risks related to Ethereum staking. When it comes to investing, we need to have a clear idea of the rewards and risks. Users that want to start staking on Ethereum have to lock their investments for months or even years. Currently, the first milestone to withdraw the staked funds is going to be 2020 (two years from now).
This is a very long period of time for the cryptocurrency market. Two years ago, for example, Bitcoin was reaching its lowest price in years ($3,200). ETH, at the same time, was falling below $100 per coin.
Freezing your investment for a period of months or years in the crypto space is already a risky thing to do. Ethereum could be affected by a bug that could end with the network in just a few days. None of those users that were staking funds would be able to withdraw their ETH.
Moreover, if you are giving the custody of the funds to a third party (including exchanges), then you do not know what can happen to them. Several exchanges have been hacked in the last years. If the exchange you use gets attacked, then the platform may run out of business.
Ethereum staking or solo mining
It is worth pointing out that if you are solo mining, you will have to be responsible for keeping the stake available. You would have to invest in the necessary infrastructure and keep always updated with the latest trends on Ethereum.
In addition to it, if you are a validator, you need to be aware that there are some issues that could make you lose your cryptocurrencies. Indeed, if the validator accidentally falls offline, it can have large negative consequences for your investment. Additionally, validators can be penalized if they process an invalid transaction.
Staking Ethereum 2.0 gives users the ability to participate within the network and earn additional ETH as a reward. Additionally, the upgrade to the Proof-of-Stake technology is another step towards a fully secured decentralized network for Ethereum.
Finally, it’s important to know that if you want to participate you can join by locking up a minimum of 32 ETH for at least 2 years. At the time of writing the ETH 2.0 staking contract has locked approximately 1.2 million ETH and the numbers are counting. Happy staking!
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