Staking

Passive income on your cryptos

Staking provides the security model for Proof-of-Stake (PoS) networks like Ethereum. Put simply, participants lock up a certain amount of their cryptocurrency holdings, known as a stake. Then these funds act as collateral allowing them to validate transactions. If they behave well, they receive rewards proportionally to the amount of stake, and if they behave badly, their stake is slashed (partially burned). This keeps the network safe and secure: the staking requirement encourages validators to act in the network’s best interests.

In the following, we will examine how staking on Ethereum works, the benefits and risks, and how to stake ETH securely. Ethereum is the second most popular blockchain today. In fact, since its transition, it’s the most popular network using a Proof-of-Stake consensus.

Solo Staking

Taking part in solo staking (also known as native staking) means becoming a validator yourself. Instead of relying on others to do this job, you take on the responsibility yourself, and earn all of the rewards that come with it.

To become a solo staker, you need to invest a minimum of 32 ETH. This acts like collateral to make sure you validate transactions effectively. But that’s not all you will need. You’ll also need a computer that is connected to the internet all the time. This computer must run the Ethereum client, which is essentially the software containing the whole blockchain’s information. If the computer you use doesn’t perform correctly, your stake could be slashed. This means solo staking comes with the burden of responsibility, plus, the barrier to entry is quite high.

That said, Solo staking on Ethereum represents the gold standard for staking. While it comes with more responsibilities than other methods, it also comes with much bigger rewards.

Staking as a Service

Staking as a Service allows you to delegate the staking process to a third-party provider, meaning you can earn rewards without managing your own validator node. This is also known as funding a validator and it allows you to leave the more technical aspects of staking to someone else, while enjoying (almost all) the benefits of native block rewards. With this type of staking, you will still need to deposit your 32 ETH.

While it offers convenience, this type of staking also involves trusting a validator with your funds. If they behave badly, your rewards will be slashed too.

Of course, fees are another aspect to take into account: the entity offering this service is doing so to make money themselves, hence you need to consider a fee for the service provider.

While this method is much more hands-off than native (solo) staking, it still has a big barrier to entry, as not everyone has 32ETH to fund a validator with.

Pooled Staking

Like funding a validator, pooled staking allows individuals to earn staking rewards without the need for extensive technical knowledge or running their own validator node. However, it also doesn’t require a 32ETH investment.

Instead of staking alone, you can also team up with other individuals. With this method, the participants can contribute any amount of cryptocurrency to a staking pool. Then the pool’s operator uses the shared funds to participate in native staking. When the operator receives the rewards, it then distributes them to the staking pool participants relative to their initial stake.

Under the pooled staking umbrella comes another interesting sub-category; liquid staking. To explain, some pooled staking platforms offer users tokens in return for their investment. These ERC-20 tokens are known as liquid staking tokens (LSTs) and they are pegged to the value of the initial asset, meaning stakers can still use their locked-up funds in DeFi platforms and blockchain apps. For example, you can use them to trade or to swap for other crypto tokens. You can also use LSTs for lending and even as collateral for borrowing other tokens. This is a key benefit as most other types of staking require you to lock up funds in a way you can’t use them.

Whichever pooled staking method you use, it’s important to consider the disadvantages. For example, pooled staking requires stakers to trust the pool’s operator. If the operator doesn’t validate transactions correctly, the validator can be slashed and this impacts all of the participant’s rewards. Another aspect to consider is that many staking pools use smart contracts to pool users’ funds, however this poses a risk. If there is a bug in the contract, bad actors could exploit the weakness and potentially access the pool’s funds.

Centralized Exchange Staking

Centralized exchange staking involves the practice of depositing your cryptocurrency assets on a centralized exchange platform to participate in staking activities and earn rewards. This approach offers a convenient alternative to pooled staking, but it also comes with its own risks.

On centralized exchanges, you’re generally forced to use the platform’s custodial wallets. This means they retain ownership of the private keys attributed to your account, and therefore custody over your assets. This can cause a problem if the exchange shuts down or closes their staking operations.