Just as Bitcoin pioneered the concept of sound decentralized money, the Ethereum network pioneered decentralized applications (dApps). Powered by smart contracts, dApps render obsolete banks, stock exchanges and other financial services that can be coded logically.
To participate in this new decentralized finance (DeFi) landscape, users can take a stake in Ethereum. Not much different from being a shareholder in the company, staking Ethereum provides rewards while securing the network.
What is Ethereum Staking?
Whether it is Bitcoin mining or Ethereum staking, both are at the core of blockchain networks. In particular, public blockchains rely on decentralization for successful monetization and self-sustainability. After all, in order for users to become part of the network by running a computer node, they must be rewarded for doing so.
Ethereum staking is one such incentive mechanism. Here’s how it works:
- Blockchain networks can be decentralized if there are nodes that work together to synchronize and relay the state of the network. This state is the public ledger that tracks all transactions, visible on Etherscan.io in the case of Ethereum.
- Responsible for coordinating the public ledger is the consensus algorithm, as part of the software installed on all nodes of the network. After The Merge, Ethereum went from proof-of-stake consensus to proof-of-stake. This reduced its energy footprint by about 99% because nodes update the network through financial staking instead of physical calculations.
- Using their stake (the amount of ETH), node validators verify transactions as non-fraudulent and add them as new blocks of data to the ledger. When they do, validators receive ETH as a reward for their validation service.
In short, Ethereum staking is the reward for guaranteeing that the network’s transactions are legitimate. On the user side of the equation, they pay this reward as ETH gas fee. However, since ETH is locked as a staking for the security of the network, there is a lock-in period to consider.
Here are some of the best options available to you:
Lido: The most popular way to bet Ethereum
At the moment, the Ethereum Foundation has not announced the end date of the staking period, but it will happen with the Shanghai upgrade sometime next year.
Ethereum validators calculate your Ethereum stake as an annual percentage rate (APY), the metric used in banking when depositing funds into a savings account. Another measure is the annual percentage rate (APR), which simply means interest yield without compounding.
After the merger, Ethereum validators can earn around 4% APR. Here’s what the Ethereum 2.0 stake looks like in raw numbers:
As you can see, apart from regular ETH staking, there is another form of staking called liquid staking. The Lido Finance platform made it popular because it eliminated Ethereum’s minimum staking requirement of 32 ETH for validators creating blocks.
How to start betting with Lido
Lido provided an alternative with liquid staking where they peg your ETH to your staked Ether (stETH) at a 1:1 ratio, just like the USDC stablecoin is pegged to the dollar. Not only can liquid participants pledge any amount of ETH, but they can also cancel their ETH at any time.
Therefore, Lido’s liquid staking solves three problems for Ethereum users in the pre-Shanghai phase: illiquidity, accessibility and immobility. Because of this flexibility, it is called liquid. When people stake their ETH with Lido, they get about 5.4% APR as stETH.
When Lido stakes your ETH to Ethereum, its smart contract aggregates all Ethereum execution level (EL) rewards, re-stakes the ETH, and then mints new stETH. Without having to wait for the validator to activate, Lido staking rewards come 24 hours after the first deposit.
Speaking of which, to start liquid staking on Lido, you first need to have a wallet full of ETH. The most popular non-custodial wallet as a browser extension is MetaMask. You can buy ETH on any major exchange like Binance or Coinbase and send it to your MetaMask wallet address. Once this basic requirement is met, go to Lido staking and link your wallet.
As you can see, Lido is as simple and convenient as it gets. In the “Rewards” tab, you can check your balance and the total earned stETH. The increase in interest rates on Ethereum, as APY, will only be possible after the Shanghai upgrade, which allows the withdrawal of locked ETH. Lido therefore only offers an APR rate.
For a 5 ETH stake, at around 5% APR, the estimated profit in one year is $332, based on the ETH price on September 29th. In three years, that’s just over $1,000. Since the national average interest rate for bank savings accounts is 0.13%, this is a superior way to secure passive income.
However, please note that Lido retains a 10% service fee from stake returns, which covers the running costs of the platform. In addition, the APR is variable, depending on the number of people engaged in liquid betting. Therefore, if there is a sudden influx of new players, the Lido APR will decrease.
Is Lido Staking safe?
Just like the cryptocurrency exchanges Binance, Coinbase or Kraken, Lido is a centralized intermediary. This means that Lido keeps the signing key of your funds. This is necessary for Lido to act as a validator on the Ethereum network.
In turn, this makes Lido a semi-custodial platform because the user can still withdraw assets and stETH through MetaMask. In this case, that wasn’t possible when Celsius Network suspended withdrawals and eventually went bankrupt.
Liquid staking is an alternative to locking a user’s bet. It allows users to stake any amount of Ethereum and effectively withdraw their ETH without trading requirements enabled.
Likewise, all potential vulnerabilities of Ethereum 2.0 are carried over to the Lido platform as well. With this, Lido’s smart contracts are open source and regularly audited.
Rocketpool: The Decentralized Way To Stake Ethereum
Lido may be semi-decentralized, but Rocketpool is built from the ground up as a reliable staking platform. RPL node runners need to stake 16 ETH to become part of the platform, while regular users only need to stake 0.01 ETH to become eligible.
Corresponding to Lido’s stETH, Rocketpool provides rETH, a liquid token pegged to ETH that frees it up for trading in dApps. Rocketpool’s native governance token, RPL, powers the decentralized staking ecosystem by rewarding node operators. Likewise, RPL token holders can vote on the platforms rules.
Rocketpool currently offers 4.86% APR, with a transaction cost of 0.00184 ETH (about $2.5).
To start staking with Rocketpool, simply go to Rocketpool staking, connect your MetaMask wallet and transfer ETH to start receiving rETH within 24 hours.
Betting on Central Stock Exchanges
An even more convenient way to stake ETH is to use crypto exchanges. After all, they cover most of the crypto traffic as it is and have the most users.
Here are the top 4 Ethereum staking platforms, according to their annual percentages. Binance and Coinbase are following in Lido’s footsteps with their own versions of ETH staked tokens:
- Binance: 5.02% – For Ethereum 2.0, Binance released beTH, a wrapped BToken that is pegged to ETH, just like Lido’s stETH.
- Coinbase: 3.28% (as APY, which may not be available for US citizens) – Coinbase’s wrapped token is called cbETH, allowing users to trade liquid ETH just like bETH and stETH.
Is Staking Ethereum Worth It?
These are the largest and most trusted exchanges with deep liquidity. Accordingly, even if they suffer a hack, they likely have sufficient funds to cover the damages. The downside is that they hold your money in proprietary wallets, so they control your crypto assets.