ETH – Interest via Staking

This report will cover the two ways you can stake your Ethereum as part of the ETH2.0 Proof-of-Stake consensus mechanism. These processes are staking independently, through the use of the beacon node client & staking as part of a pool. At this end of this report there is a conclusion comparing the different lending options and their APYs.

  • How you can stake your Ether on Ethereum2.0
  • How to stake with less than 32ETH
  • How to make passive income with your Ethereum

The Ethereum blockchain has used a consensus algorithm called the Proof-of-Work (PoW) since its inception, this is the same consensus mechanism used by bitcoin. The basic concept of the algorithm is that miners compete against each other to validate the next block, if they successfully validate the next block they are rewarded with crypto. There are many problems associate with this method, mostly the limiting scalability.

The Proof-of-Stake (PoS) consensus mechanism was built to address the scalability limitations created by PoW. PoS has validators work together to forge the blocks in the blockchain. The plan for Ethereum was always to move over to the PoS consensus; and that is what’s happening with ETH2.0.

To learn more about Proof of Stake & the Ethereum2.0 check out the Cryptonary report by clicking here.

 

Staking Independently

To stake Ethereum independently you will need:

  • A computer capable of running the Beacon Chain Client
  • A stable internet connection
  • 32ETH to stake

The barrier for entry to stake on the Ethereum network is a lot lower in terms of physical hardware compared to Proof-of-Work. If you have a modern computer or laptop you will be able to run the Beacon Chain Client. A wired ethernet connection is also more than sufficient, if you ISP experiences more than 1% downtime you may want to consider switching providers.

Limitations

The most limiting factor of Ethereum staking is the 32ETH required to become a validator. If you aren’t holding 32ETH you can still partake in Ethereum staking as part of a pool which is covered in the next part of this report.

If you stake your Ethereum now during phase 0 you won’t be able to withdraw your Ethereum until phase 1.5 is rolled out. As there is no timeline on when this is set to happen experts have estimated it may be around 1 to 3 years

Non-Custodial Staking

If you are holding more than 32ETH and you wish to run a validator, but you don’t have the facilities to do so you can use a Non-Custodial staking platform. These platforms will run your node for you in exchange for a small fee. You will have full control over your own node at all times and will receive all of the staking rewards. To stake non-custodially you will have supply Ether in multiples of 32.

Risks

The main risk associated with independently staking on ETH2.0 is penalizations for bad network activity. If you are purposefully validating fraudulent transactions on the blockchain you will be penalized by losing part of your staked ETH.

A more common reason to be penalized is for being offline when it is your turn to validate the next block. If for any reason you are not online when it arrives to be your turn to validate you will lose part of your staked ETH.

Rewards

The reward for ETH2.0 staking is dependent on the amount of ETH currently being staked on the network.

This graph shows the current amount of ETH staked on the network is around 3million, this results in the APY being around 9%. As new validators join the network, each staking their own 32ETH, the ‘Total ETH Staked’ value will increase. This will result in the APY decreasing.

 

Staking in a Pool

If you are holding less than 32ETH and you still wish to contribute to the Ethereum blockchain by staking your tokens you can do so by joining a pool. A pool is essentially a collection of users who want to stake their currency but are unable to do so individually. Their capital is collected and used to activate a validator.

Liquidity

Arguably the biggest drawback to staking your ETH is that it is locked in the ETH2.0 smart contract until phase1.5 is rolled out. This may be a few years from now & a lot of crypto holders don’t want to lock their money away for such a long time. Certain staking pool platforms have addressed this illiquidity issue through the use of a native token.

Certain staking platforms will offer you a native token that holds a 1:1 value to its underlying asset, ETH. You are free to do what you wish with this token. You can trade, sell, exchange or use it as collateral for taking out crypto loans.

If you are holding more than 32ETH but you were initially uninterested in staking due to the illiquidity of the staked Ethereum you can now stake through a pool & receive the native tokens. Keeping your Ether liquid.

When Phase1.5 is fully rolled out these sites will enable you to exchange your native tokens back into the underlying ETH tokens plus the interest they would have accumulated in this time.

Stake on Kraken

Kraken has over 315k Ether in their ETH2.0 staking address. They are also offering a ETH2.0 trading pair, this keeps your staked ETH liquid. They do however warn that price slippages of this pair are to be expected, especially if exchanging large amounts.

Stake on Lido Finance

Lido finance is an Ethereum2.0 staking solution, they have accumulated over 144k Ethereum in their staking address. Lido supplies you with stETH tokens, these tokens represent ETH at a 1:1 ratio. You can trade, sell & swap these tokens at any time. You can also use theses tokens as collateral when taking out crypto loans.

Lido finance will automatically pay you interest daily, in stETH, directly into your wallet. The current APR on lido finance is 4.2%, which is around 5 points lower than the typical interest you would expect when staking ETH2.0. This is because Lido finance instantly starts paying you interest, whereas usually you would have to wait for the validator node you staked towards to activate. This can take a long time, especially with the influx of new validator applicants on a daily basis. As the number of validators on the network increases so will the average annual return (APR).

Risks & Drawbacks

Although pool staking solves a lot of problems people have with Ethereum2.0, mainly illiquidity, it does have some of its own drawbacks. The most prominent being the fees, Lido finance for example takes a 10% fee of all profits made from staking.

There is also the risk of the node operator being penalized for validating fraudulent transactions, or being offline when it is their time to validate the node. If they are for whatever reason penalized by the network and your investment is affected it is unlikely that you will be reimbursed for the lost ETH.

Conclusion & Comparisons

If you have the resources to stake independently and you don’t mind not being able to access your Ether for up to 3 years the returns you will make from staking independently will be greater than that of staking as part of a pool. This is due to not having to pay the pool provider between 10-20% of the profit. If you don’t have the facilities to run a validator without the risk of being penalized non-custodial staking may be the most optimal option.

Staking as part of a pool is your only option if you have less than 32ETH. If you are okay with the idea of holding for a long period then looking for a pool provider with lower fees but with a less liquid exchange pair may be the preferred option, or a provider with no liquidity at all. If you want your Ether to remain liquid your best option may be the platform that offers the most liquid trading pair.

If you are holding more than 32ETH, but you don’t wish to have your Ether locked for 1-3 years you may also opt to use a pool.

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