How to Stake Ethereum (2024)

Ethereum (ETH) is the second-largest cryptocurrency by market cap after Bitcoin. Recently, Ethereum changed its consensus mechanism to allow anyone to participate in staking, the process of locking up ETH tokens to help secure the Ethereum network and earn rewards in return.

When you stake ETH, you are essentially acting as a validator for the network. Randomly chosen validators holding a minimum amount of ETH are responsible for verifying transactions and adding new blocks to the blockchain. In exchange for your work, you earn freshly minted ETH and portions of network transaction fees.

This article will explore Ethereum staking and its benefits and risks, as well as share tips for finding a reliable and trustworthy staking platform based on criteria such as security, fees, and reputation.

Understanding Ethereum Staking

Ethereum staking was made possible after the network transitioned from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism, also known as Ethereum 2.0 or Eth2, in September 2022. Ethereum staking is not just possible after it switched to PoS, it's essential for the Ethereum blockchain to function.

Before the switch, computational consensus was used to validate transactions and add blocks to the blockchain. Similar to Bitcoin's PoW system, which allows participants to earn newly minted BTC, Ethereum cryptocurrency miners competed to solve complex mathematical puzzles, and the first to solve the puzzle would earn the right to add the next block and receive a reward in ETH. PoW was energy-intensive and required specialized hardware.

After the switch, social consensus became used to validate transactions and add blocks to the blockchain. Validators can now stake their ETH to participate in the network, and are chosen randomly to add blocks and earn rewards. PoS is significantly less energy-intensive and does not require specialized hardware.

The transition from PoW to PoS, known as "The Merge," marked a significant milestone in Ethereum's development, addressing key concerns of energy consumption, scalability, and centralization associated with PoW.

PoW consumed vast energy, raising environmental concerns and the overall cost of maintaining the Ethereum network. Additionally, reliance on computational power limited the network's scalability and favored miners with access to specialized hardware and cheap electricity. Centralization of network power hindered Ethereum's ability to handle a growing number of transactions and users.

How to Stake Ethereum

Users who want to participate in Ethereum staking have the option of solo staking, staking-as-a-service, or pooled staking. The tradeoffs and trust assumptions of staking independently or through an intermediary vary.

In general, staking-as-a-service and pooled staking are good options for those with smaller amounts of ETH, as there may be no minimum deposit requirement. Solo staking offers the highest potential rewards, but it requires a higher minimum deposit requirement and a capital investment associated with the purchase and maintenance of hardware for a node. This computer will act as a validator.

Minimum deposit requirements for staking-as-a-service and pooled staking, if there are any, are lower than for solo taking. Some exchanges and wallets may require a minimum deposit of as little as 0.1 ETH to 5 ETH worth of cryptocurrency. Staking solo will always require a minimum stake of 32 ETH, the amount required to run a validator node on the Ethereum network.

Hardware costs for the Ethereum validator node start at $1000 to $2000 and can go up from there,depending on the specific components and their quality and whether these components break down, become outdated, and need to be replaced.

Solo Staking

Solo staking is when you set up your staking node, run the software on your hardware, and generate and hold the node's cryptographic keys, which consist of both public and private keys, by yourself. This independence offers maximum control and decentralization, but at the cost of constant uptime and technical expertise.

Failing to properly set up the validator node, secure its keys, understand the Ethereum network's protocols, and propose or vote on a block on time could result in loss of funds and prove challenging for users with non-technical backgrounds and busy schedules.

The average frequency of proposing a block is approximately once every 45 minutes, and the average frequency of voting on a block is approximately once every 45 seconds. These frequencies are estimated using probability calculations associated with validator selection.

The probability of being chosen to propose a block equals the validator's stake divided by the total amount of ETH staked by all validators on the network. A validator with 32 ETH staked would have a probability of approximately 0.0001024 of being chosen to propose a block in each slot.

The probability of being chosen to vote on a block equals the validator's stake divided by the total amount of ETH staked by all validators participating in the current epoch. An epoch is a fixed period of time in which validators are assigned to committees. A validator with 32 ETH staked would have a probability of approximately 0.0006075 of being chosen to vote on a block in each slot.

Staking-as-a-Service

Staking-as-a-service is when you delegate your staking rights to a third-party service provider who manages the validator node and staking process on your behalf, such as a crypto exchange or wallet. Pooled staking similarly involves delegating your ETH to a group of validators who are responsible for running the nodes, but you combine your ETH with other stakers to pool resources and share rewards.

Staking-as-a-service and pooled staking are less technical options that don't require setting up a validator node and managing keys. Still, they involve surrendering some control, introducing counterparty risk, and potentially sharing personally identifying information (PII) with the service provider. You may need to provide your full legal name, date of birth, government-issued identification, physical address, email address, and phone number to comply with Anti Money Laundering (AML) and Know Your Customer (KYC) procedures.

A number of crypto wallets and exchanges support staking-as-a-service and pooled staking. Centralized crypto exchanges offering native ETH staking include Coinbase, MetaMask, and Kraken. Decentralized crypto exchanges include Lido Finance, Rocket Pool, and StakerDAO. Crypto wallets comprise hot wallets and cold wallets and include many of the brands running top exchanges, Ledger, Trezor, and KeepKey. Once you have a wallet or an exchange account, you can transfer ETH to it to start staking.

Benefits of Ethereum Staking

Ethereum staking allows you to passively earn income on your ETH holdings simply by locking up your existing ether cryptocurrency. These rewards are distributed periodically and have the potential to appreciate if the ETH's price goes up. The amount of rewards depends on the amount of ETH you stake, the length of time you stake it, and the overall staking activity on the network.

Ethereum staking gives you the right to participate in network governance decisions and strengthens the network's security by incentivizing validators to act responsibly and honestly. Validators can vote on proposed changes to the protocol, such as upgrades or new features. A participatory model ensures that the Ethereum network remains responsive to the needs of its users and stakeholders.

Ethereum staking contributes to the network's scalability and environmental friendliness by replacing energy-intensive computer mining with the less resource-demanding process of human validation. PoS eliminates PoW's need for massive amounts of electricity and specialized mining hardware, which is difficult to reuse or recycle at the end of its life cycle.

Staking lowers the barrier to entry for participating in the Ethereum network's consensus process. Unlike mining, which required specialized hardware and technical expertise, staking can be done by anyone with an Ethereum wallet and a small amount of ETH tokens. Ethereum staking promotes decentralization and democratizes participation in network governance.

Risks of Ethereum Staking

Staking ETH comes with potential volatility, illiquidity, technical issues, and financial penalties. The price of ETH could drop or the validator could stop working as intended due to malfunctions, errors, and hacks, causing you to lose some of your investment. Your staked ETH will be locked up for the duration of the staking period, and you will not be able to access it during that time. Your staked ETH could be fined or slashed if you don't vote, go offline, or behave maliciously.

In the Ethereum network, validators who miss head, source, and target voting deadlines face penalties equal to the rewards they would have received had they submitted their votes.Head, source, and target votes are crucial aspects of the PoS consensus mechanism and play a significant role in approving new blocks in the Ethereum blockchain.

• Head vote: A validator's attestation on the most recent block they believe to be the tip of the chain. This vote signifies the validator's agreement with the current state of the blockchain. By casting a head vote, validators finalize the most recent blocks, making them irreversible.
• Source vote: A validator's attestation of the most recent justified checkpoint of the chain. A checkpoint is a snapshot of the blockchain at a specific point in time. Justified checkpoints represent blocks that have been sufficiently finalized and are unlikely to be reverted. Source votes help establish that checkpoints are justified.
• Target vote: A validator's attestation on the first block of the current epoch. An epoch is a fixed period of time in which validators are assigned to committees. Target votes help to ensure that all validators are on the same page regarding the start of the current epoch.

Slashing is a severe penalty in which a validator is removed altogether from the Ethereum network and loses their staked ETH. Slashing can occur when a validator behaves maliciously by proposing and signing two different blocks for the same slot, attesting to a block that surrounds another block, or double voting for two candidates for the same block.

• Proposing and signing two different blocks for the same slot: The act of a validator submitting two conflicting block proposals for the same slot in the chain. This behavior creates a fork in the chain, jeopardizing the network's consensus and potentially leading to double spending attacks.
• Attesting to a block that surrounds another block: The act of a validator attesting to a block that includes another block already finalized in the chain. This behavior violates the chain's structure and could lead to inconsistencies in the block history.
• Double voting by attesting to two candidates for the same block: The act of a validator attesting to two different validators as the proposers of the same block. This behavior creates ambiguity regarding the block's proposer and could undermine the network's consensus mechanism.
  

When a validator is slashed, 1/32 of their staked ETH is immediately burned, permanently destroying it from the Ethereum network, while a 36-day removal period gradually removes their remaining staked ETH.The dual penalty structure of slashing is designed to punish the validator for misbehavior, deter others from doing the same, and prevent the validator from immediately rejoining the network and continuing to cause problems.

Halfway through the removal period, an additional penalty, the "correlation penalty," is applied. The correlation penalty is designed to discourage validators from colluding to slash each other. The magnitude of the correlation penalty scales upward with the total staked ETH of all slashed validators in the 36 days prior to the slashing event.

Factors to Consider When Choosing a Staking Method

Deposit requirements, staking fees, coding ability, service provider quality, hardware costs, and cybersecurity are important when choosing how and where to stake Ethereum. We discuss some of these factors below.

• Deposit Requirements: Minimum deposit requirements influence the flexibility of staking strategies. Higher minimum deposits may require longer staking periods to break even and take away capital from an investment portfolio. Lower minimum deposits may encourage shorter staking periods and free up capital allocations for other investment areas.
• Cybersecurity: Staking involves locking up a significant amount of cryptocurrency for an extended period of time. Selecting a platform with top-notch cybersecurity, digital safety, and technological resilience can mitigate the risk of loss and thefts.
• Staking Fees: Staking fees vary widely between different wallets and exchanges and significantly impact overall returns. It is important to carefully calculate commission fees charged to your staking participation and choose a provider offering competitive fees.
• Quality Assurance: A high-quality wallet or exchange with a strong track record of software engineering and product development can provide added security and peace of mind when staking, especially if you are locking up a huge amount of ETH.Larger companies tend to have stronger talent and standards than smaller upstarts that run staking services.
• Customer Service: If you run into any issues or have questions about staking, it is better to have access to responsive and helpful customer service. A wallet provider or an exchange with dependable customer support can make the process smoother and less stressful.
• Time Commitment: Validators are responsible for processing transactions and maintaining the blockchain. On average, a validator with 32 ETH staked can expect to be chosen to propose a block roughly every 45 minutes and to vote on a block roughly every 45 seconds, requiring extensive time commitment from solo stakers. Downtime can result in missed rewards or financial losses.
• Waiting Periods: Some third-party staking methods have long waiting periods before rewards are distributed. If you are delegating your staking, finding a service that offers fast distribution times to minimize illiquidity and maximize returns, which can be reinvested is important.
• Coding Ability: Setting up and interacting with a validator node for solo Ethereum staking requires basic coding knowledge. While some aspects of the setup can be done through graphical user interfaces, some steps require command-line interactions and familiarity with coding concepts.
• Hardware Costs: For solo staking, you must purchase and maintain specialized hardware, such as a validator node. The upfront hardware cost and ongoing maintenance can be significant, ranging in the thousands of dollars.

Staking Independently

Here's a breakdown of the steps to run an Ethereum validator node on your own:

1. Purchase the hardware. Consistently reliable hardware for solo staking typically includes a powerful computer with a high-performance CPU such as an Intel Core i7 or AMD Ryzen 7, ample RAM of 32GB or more to support the demanding staking software, sufficient storage of at least 2TB SSD to store the entire Ethereum blockchain, and a stable Internet connection with high bandwidth and low latency.

2. Install the necessary software. The software for Ethereum staking includes the Ethereum client, validator client, and any additional tools, typically involves downloading and compiling the software from source code or using package managers like apt or yum. This requires some familiarity with command-line environments and basic Linux/Unix commands.

3. Configure the validator node. Edit the node's configuration files, set up its network settings, and generate its cryptographic keys. This requires understanding the structure of configuration files, syntax of specific commands, and the usage of tools like "geth" and "geth attach" for interacting with the Ethereum network.

4. Monitor and maintain the validator node. Check logs, update software, troubleshoot issues, and ensure consistent uptime. This requires familiarity with log analysis tools, understanding error messages, and applying software updates through command-line tools or package managers.

Staking Via Cryptocurrency Exchanges

Here are the steps to stake Ethereum via a crypto exchange:

1. Sign up for an account. The first step is to sign up for an account on the exchange. This typically involves providing personal information, verifying your identity, and setting up a payment method to purchase ETH.

2. Purchase ETH. Once your account is set up, you will need to purchase Ethereum. This can usually be done through a variety of payment methods available on the exchange, such as bank transfer, credit card, or debit card.

3. Transfer ETH to the exchange's staking program. Once you have ETH in your exchange's wallet, you should be able to find an option to stake ETH within the wallet itself. The specific steps may vary depending on the exchange, but typically you will need to navigate to the staking section of the wallet and follow the instructions to stake your ETH.

4. Choose your staking options. The next step is to choose your staking parameters, such as the amount of ETH you want to stake and the length of time you want to stake it for.

5. Start staking and earning rewards. The rewards will typically be added to your account periodically, depending on the specific staking program and its payout schedule.