Staking is quite a common term with cryptocurrency enthusiasts; being a venture that rewards you with interests like a traditional fixed deposit, everyone wants to participate in staking. Staking is only typically applicable to Proof-of-Stake (PoS) blockchains, where validators are rewarded for maintaining the network by locking up their crypto assets for a specific period.
Initially, Ethereum was a Proof-of-Work (PoW) blockchain; however, Ethereum developers are looking to migrate the network to Ethereum 2.0, where the blockchain will function as a Proof-of-Stake (PoS) network to increase the scalability of the network, reduce speed, and make it suitable for hosting Web 3.0 dApps for real-world mass usage.
Ethereum 2.0 has been rolled out in several stages since December 2020, when the beacon chain was created to test the staking capabilities of the Ethereum network; as a result, people are allowed to stake Ethereum tokens to become validators in Ethereum PoS.
What Does Ethereum Staking Entail?
Ethereum staking involves locking up a minimum of 32 ETH (over $35,000 as of the time of writing) to become a validating node in the Ethereum network; these tokens will remain locked till the upgrade is completed (projected to be 2023).
However, only a few can afford to lock that amount of money in a protocol. Hence, many staking pools have been created to help people participate in Ethereum staking by allowing them to delegate considerably smaller amounts of ETH to earn validation rewards. Currently, the Average Percentage Rate of Interest is 4.2%, which had massively reduced from the initial 20% when Ethereum staking began. Nevertheless, you can benefit from Ethereum staking without locking up 32 ETH by using staking pools, as explained below.
Decentralized Staking Pools
Rocket Pool is the most common decentralized staking pool for staking Ethereum, focusing on facilitating cheap options for Ethereum staking. Rocket Pool functions with smart contracts that allocate rETH (a liquid staking token) for every ETH that represents the staked tokens.
Unlike many staking pools, anyone can become a node operator in Rocket Pool by creating a mini-pool. This mini-pool is created by depositing 16 ETH, and then the node operator needs to gather a minimum of 16ETH from user deposits to be a validating node. Everybody else contributing to the mini-pool is only required to delegate a minimum of 0.01 ETH (about $11) to any mini-pool of their choice within the Rocket Pool.
To counteract malicious actions, the Rocket Pool requires the node operator to stake a minimum of 10% of their ETH’s worth in RPL (Pocket Pool’s governance token). For example, if the node operator stakes 16 ETH, they are required to stake 1.6 ETH worth of RPL as collateral; hence, if they suffer a validator slash due to inappropriate actions, the collateral will be used to compensate the delegators.
The Rocket Pool protocol charges 5-20% commissions for using the staking pool.
Lido works similarly to Rocket Pool by providing users with staked Ether after interacting with the protocol; for every ETH staked, the users will get stETH in return, which can be used as a liquid staking token. However, unlike Rocket Pool, where anyone can be a validator node, Lido chooses validators for its protocol via the Lido DAO (which comprises LDO token holders).
Lido has no minimum staking requirements; you can stake as little as possible.
Lido is more scalable than Rocket Pool since stakers are assigned to validating nodes by the DAO members, but Rocket Pool allows anyone with 16 ETH to be a validating node, making it decentralized. Hence, Lido is more scalable, and Rocket Pool is more secure.
Stkr is a DeFi staking protocol created by Ankr, specifically for Ethereum staking. To stake Ethereum via Stkr, you need to connect your wallet to the stkr protocol and delegate a minimum of 0.5 ETH to a validating node (the protocol can also automatically delegate your tokens on your behalf.
Like other staking pools, Stkr provides stakers with aETH in a 1:1 ratio for every ETH staked, which can be used as a liquid staking asset.
StakeWise is a staking pool without minimum requirements. It allows several people to pool together the minimum 32 ETH required by Ethereum before assigning these funds to a Validator selected by the StakeWise DAO. All penalties and rewards are shared among stakers according to their pool share.
Like other staking platforms, StakeWise issues tokenized Ethereum (sETH2) to stakers in a 1:1 ratio share of their investment.
Centralized Staking pools
Stakefish is a centralized platform that provides staking services by running validator nodes for Proof-of-Stake (PoS) blockchains. You can delegate your tokens to Stakefish’s protocol to earn staking rewards. The minimum stake with Stakefish is 0.1 ETH, and once a deposit contract reaches 32 ETH, the protocol will assign a validator to take charge. The minimum stake required to use Stakefish is 0.1 ETH with a 10% commission.
Centralized Exchanges (CEXs)
Several CEXs have created their Ethereum staking services, which makes it easier for users who aren’t very familiar with the nuances of DeFi. CEXs like CoinBase, Kraken, Binance, Bitfinex, Poloniex, eToro, OKEx etc.
Staking with CEXs could be advantageous as you can unlock your stake anytime, unlike DeFi protocols that limit your asset’s liquidity. Additionally, CEXs offer attractive APR options, and beginners can use them. However, the drawback with CEXs is that they are completely custodial and require trust; hence, if anything happens to the CEX, the funds may be irrecoverable.
Ethereum staking is a profitable and rewarding idea if you intend to hold your Ethereum tokens for over a year; instead of lying fallow in a wallet, staking helps you earn yield from your Ethereum tokens while contributing to the future of Ethereum.
Of course, crypto staking offers attractive yields, way more than traditional finance; however, the volatility of the crypto market can eat deep into your capital’s worth. As a result, you are advised to Do Your Own Research (DYOR) before making any vital crypto investment decision.
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