Staking Ethereum – how does it work?
The concept of staking has been a fixture in the blockchain and cryptocurrency world since Peercoin created the concept in 2012. Staking allows token holders to contribute to the security of a blockchain blockchain by helping to confirm transactions and getting rewarded with coins as payment. Staking takes place on blockchains running a proof-of-stake consensus mechanism, which is different to the proof-of-work consensus mechanism on which Bitcoin runs.
Another project that also runs on a proof-of-work consensus mechanism is Ethereum, although it is in the middle of a switch to proof-of-stake which is slated to happen in the next 12-18 months. This means that it will be possible to stake Ethereum, a possibility that is attracting a lot of attention. In this article we explore why staking Ethereum is beneficial both to the project and the staker and also how to go about staking Ethereum.
What is Ethereum?
Ethereum is the second-biggest cryptocurrency by market cap, but unlike Bitcoin, which is mainly a currency and store of value, Ethereum is a decentralized computing platform that supports many of the biggest movements in the crypto space, such as DeFi and NFTs.
Ethereum also serves as the backbone for a variety of games, stablecoins, and complex databases, and continues to play a key role in the future of the crypto industry despite launching in 2015. Having operated on a proof-of-work mechanism since its launch, Ethereum developers have decided that a change to proof-of-stake is necessary to ensure its future, bringing with it faster speeds and lower transaction costs among other benefits.
What is proof-of-stake?
The proof-of-stake consensus mechanism offers a number of advantages over other consensus mechanisms. Projects that operate on a proof-of-stake blockchain don’t require the environmentally damaging mining practices that have dominated headlines about Bitcoin in recent years, with the global network of nodes responsible for processing and confirming transactions.
These nodes are ‘Validators’’, regular people who have locked up a set amount of ETH tokens as collateral and collect rewards as they process transactions. With popular blockchains such as Ethereum, decentralization is achieved through a large number of nodes being spread around the world.
As we will see, staking can be done privately through a home computer or, in the case of Ethereum staking, through an exchange. There are pros and cons to both of these as we will explore.
If a Validator fails to carry out the validation in a manner that maintains the network’s integrity, a “slashing” event occurs where some or all of their collateral is “burnt” as a consequence for introducing errors to the validation process. This incentivizes Validators to behave correctly.
How does Ethereum staking work?
Ethereum Validators are charged with adding new transactions to a shard block after being randomly chosen by the Beacon Chain. Sharding is the process of splitting a transaction into multiple pieces (shards) that are processed simultaneously to speed up transactions.
Validators who aren’t chosen to propose a new block won’t sit idle though – they are charged with the responsibility of attesting to the chosen Validator’s proposal. Attesting simply means they are expected to verify and confirm that the validation has been carried out as it should. In reality, it is the attestation that gets recorded in the Beacon Chain, not the transaction itself.
A minimum of 128 Validators, known as a ‘committee’, participate in the attesting exercise on each shard block. The committee is given a “slot”, which is a time-frame within which the committee must propose and validate a shard block.
A slot will produce only one valid block, and once this is achieved the committee will be dissolved and reconstituted with a different set of Validators. The goal of the dissolution is to prevent the takeover of any shard by negative actors.
With enough attestations to back it up, the new shard block proposal is confirmed as having been added to the Beacon Chain by the creation of a “crosslink.” The creation of the crosslink signifies the end of the process, and the Validator is promptly rewarded with the newly minted ETH.
Becoming a validator requires the locking up of ETH, but just because your coins are staked this doesn’t mean they are no longer in your possession; they are still yours, but you cannot use them during the period in which they are being staked. You can unstake your coins at any time, but you may lose rewards if you do so before a certain period of time has elapsed, depending on where you have chosen to stake your coins.
How to stake Ethereum
There are various ways you will be able to stake Ethereum when the facility is enabled, each of which have their own advantages and disadvantages. We’ll explore these different options now so you can see what will suit you best.
The ‘purest’ way to stake Ethereum will be through the Ethereum client. Going directly via the Ethereum client allows you to bypass middlemen and go directly to where the action is, with the caveat that you will need to stake a minimum of 32 ETH in order to do it this way. Also, the entire staking process is on you, meaning that you have to make sure your client has excellent uptime.
Staking via the Ethereum wallet starts with you depositing 32 ETH as collateral, after which you will be given access to the Validator software. Validators are charged with storing data, validating transactions, and creating new blocks to be added to the blockchain. This exercise improves on the existing level of security of the Ethereum network and rewards you with new ETH.
Rewards are given to Validators for authenticating transactions and creating new blocks. Validators who are not chosen to validate the blocks are also rewarded for carrying out attestation of the validated blocks.
However, rewards are contingent on stakers working in accordance with the rules to benefit the network. If you carry out malicious acts or your hardware for offline or fails to validate when chosen, your ETH collateral will be slashed as a consequence.
- Have 32 ETH to deposit
- Ensure client has good uptime, including internet connection
Once you have met the aforementioned requirements you’ll be taken to the Launchpad site where you will be on-boarded to the Validator software. These are the steps you must take to stake your ETH.
- Sign advisory T&Cs
- Choose client
- Generate keys
- Upload deposit data
- Connect wallet
Click here to find out more about staking Ethereum through the client.
Coinbase is one of the biggest and most secure crypto exchanges in the world. They announced Ethereum staking in April 2021, with the rewards coming in the form of ETH2 tokens which stakers will be able to sell when the Ethereum protocol passes Phase 2.
The advantage to using Coinbase is that there is no 32 ETH minimum, meaning you are free to stake whatever you like and you can rely on Coinbase’s high security protocols.
However, using Coinbase means handing over a plethora of personal identification to complete KYC/AML requirements which some may not like, and once you have submitted your ETH for staking you can’t redeem it until the protocol goes live after Phase 2.
Also, if the staking and rewards happen on Coinbase as opposed to the Coinbase Wallet then the platform will hold the tokens, and your stake, not you.
- Hold any amount of ETH in your Coinbase account
- Live in a jurisdiction eligible for ETH staking
- Complete identity verification
- Download Coinbase Wallet
- Choose a Coinbase Wallet username
- Securely store your recovery phrase
- Understand and plan for Ethereum network fees
- Buy and transfer ETH to Coinbase Wallet
- Use your ETH to buy Ethereum Stake in the trade tab
Coinbase says that Ethereum stakers can expect their first rewards payment after approximately two weeks of staking. After this initial credit, stakers will receive a snapshot of their rewards daily.
For more information on staking Ethereum through Coinbase, click here.
Binance is another big exchange offering Ethereum staking when it goes live, with users allowed to stake any amount they like over 0.1. Binance offers a “one-click staking” mechanism which it says makes for a quicker and easier experience. Like Coinbase, staking now will earn you a proxy coin, BETH, which will be redeemable for ETH after Phase 2.
Like Coinbase, you will have to hand over plenty of personal information when setting up your Binance account, and you will not be able to retrieve your staked ETH until Phase 2. Also, any ETH you stake will be under Binance’s ultimate control, as will any rewards you earn, until you remove them to your own wallet.
- Hold at least 0.1 ETH in your Binance account
- Live in a jurisdiction eligible for ETH staking
- Complete identity verification
- Log in to your Binance account and click [Finance] – [Binance Earn]. Scroll down to [ETH 2.0 Staking] and click [View More].
- Click [Stake Now], enter the amount you want to stake, and click [Confirm].
- A second confirmation window will pop up. Please double-check the terms and conditions and click [Confirm] if you agree.
- During the ETH 2.0 staking period, BETH rewards will be distributed daily based on user BETH holdings.
Binance says that it will “regularly distribute on-chain rewards to all participants based on their BETH position.”
You can redeem your ETH once the first phase is complete and ETH 2.0 implements shard chains. Meanwhile, you can swap BETH to ETH on a 1:1 basis as soon as you’ve earned it, giving it an advantage over Coinbase in the exchange-staking battle.
Get started with Ethereum staking on Binance here.
Ethereum Staking Pools
The mechanics of the proof-of-stake protocol mean that the more ETH you stake the higher your chances of getting picked to validate a shard. So how do you increase your stake without buying more ETH yourself? The answer is a staking pools, where multiple holders people aggregate their ETH and stake it as one entity, thereby improving their chances. Joining a pool could also be very beneficial if you are new to staking.
If chosen to carry out the block validation exercise, the pool receives the newly minted coin and shares it proportionally to the contribution of each pool member.
This may seem an easy way of increasing your chances of staking success, but operating a staking pool tends to be very technically and financially taxing due to the amount of time and expertise needed. Pool operators therefore usually charge a fee to offset the costs which is typically taken off the staking rewards that the pool is granted.
The simplest way of taking advantage of a pool setup is to stake your ETH on exchanges like Coinbase and Binance, where costs are often absorbed by the platform and the minimum contribution is lower.
We have outlined three popular ways of staking Ethereum, but there are others out there that are worth exploring. Proof-of-stake has the potential to propel Ethereum into a new era, benefiting both the platform and its supporters. Anyone can stake ETH and get rewards, knowing that they are assisting in making the protocol more secure while doing so.
The fact that Ethereum staking can be conducted through exchanges is great news for beginners looking for a bit of extra income, while those who have the wherewithal can stake privately, knowing that they have full control over their coins.
While proof-of-stake offers benefits for Ethereum and its supporters, there is an element of risk that it’s important to mention. Despite its age, proof-of-stake is still a nascent technology, so there is still the possibility that problems could arise, such as bugs or a complete crash of the infrastructure.
This is yet to happen to a proof-of-stake project, but then there has never been a migration of the size and scale of Ethereum’s. Critical bugs are always being discovered in blockchain projects, and with so much code being required, and plenty of people looking to take advantage of any slip up, the stakes, so to say, are very high indeed.
However, if Ethereum developers can deliver a successful migration to proof-of-stake, you now have the knowledge of how to best go about staking Ethereum.