In recent years, the concept of staking has become increasingly popular, with Ethereum staking emerging as one of the most widely used methods in the crypto space. It involves the process of depositing Ethereum coins into smart contracts and getting rewards. In this article, you will learn about Ethereum staking and how it works.
What Is Ethereum Staking?
Ethereum underwent a major transition when it shifted its consensus mechanism from proof-of-work (POW) to proof-of-stake (POS). This change altered how transactions are validated and blocks are added to the blockchain. Previously, Ethereum, similar to Bitcoin, relied on spending large amounts of computational resources and electricity for validation.
But now, with the implementation of POS, Ethereum utilizes the method of staking to validate transactions and maintain the operation of the blockchain, significantly reducing resource consumption. This transition to POS was known as “The Merge,” and it represents a significant milestone in the development of the Ethereum blockchain.
Ethereum staking is the process of holding (staking) a specified amount of Ether (ETH) for a certain period of time. By staking coins, individuals become validators for the Ethereum blockchain. Validators are randomly chosen to verify transactions and add new blocks to the network. For every validation, validators earn rewards and interest on their coins.
What Is The Process of Ethereum Staking?
To participate in Ethereum staking, users must stake a minimum of 32 ETH to qualify as validators. Setting up a validator node is then necessary to run the staking software. After depositing the required ETH into the staking contract on the blockchain, validators are selected to validate transactions and propose new blocks based on their staked amount.
Validators are responsible for accurately validating transactions and adding them to the blockchain to earn rewards. However, incorrect validation may result in penalties or slashing, including losing a portion of the staked ETH. Withdrawal from staking is possible at any time, but depending on the staking protocol, there may be penalties or waiting periods for early withdrawals.
How Does Ethereum Staking Work?
In the Ethereum blockchain, each round of validation bundles together 32 blocks of transactions. Each round of validation lasts for 6.4 minutes, and the bundled blocks are called epochs. The epoch is said to be finalized, and transactions become irreversible when two or more such epochs are added by the blockchain.
During the validation, the Beacon Chain will randomly divide stakers into groups of 128 called the “Committees” and assign them a specific shard block. Each committee has a “Slot,” which is a fixed time frame of 12 seconds. Within this slot, the committee proposes new blocks and validates the transactions inside them. An Epoch compromises 32 slots, which require 32 committees for validation.
When the committee is assigned a block, one random member will be granted the power to propose a new block while the remaining 127 members vote on proposals and attest to the transactions. Once a majority of the stakers in the committee attest to the new block, it is added to the blockchain. To verify its insertion into the network, a cross-link is formed. The member chosen to propose the block will receive the reward.
The process of dividing the Ethereum network into multiple parts is known as sharding. The divided parts are called shards, and each shard has its own state, which includes a distinct set of account balances and smart contracts.
The Beacon chain gathers information about the balances and contracts from each shard’s state and distributes it to the neighboring shard to keep the network in sync. Furthermore, it handles everything from registering the validator contributions to granting awards and punishments.
How to Stake Ethereum?
When it comes to staking Ethereum and earning rewards, users have different options to choose from. They are:
Solo Staking
Solo staking involves staking Ethereum individually, requiring a minimum of 32 ETH and the necessary hardware and software to operate an Ethereum validator node. This setup grants control over the validator’s public and private keys and requires continuous internet connectivity to maintain the node.
Failure to maintain constant connectivity, configure the validator node, understand Ethereum protocols, and the like could result in penalties being applied to the validator’s ETH holdings. Although solo staking offers complete control and decentralization, it requires consistent uptime and technical skills.
Solo staking has many risks, such as penalties for not staying online, slashing large amounts of staked ETH, and being ejected from the network. Nonetheless, it offers the best rewards, enabling validators to receive full rewards directly from the protocol.
Staking-as-a-Service (SaaS)
Staking-as-a-Service, also known as SaaS, is a method in which users delegate power to third-party service providers to maintain their validator node and staking process. These third-party providers are usually wallets or cryptocurrency exchanges.
To utilize this service, users are required to deposit a minimum of 32 ETH and share their validator keys and the node with SaaS providers. Some providers may require a full set of details, such as name, DOB, etc., to comply with KYC regulations and anti-money laundering laws.
This type of service is best suited for those who want to stake Ethereum but lack the necessary hardware or knowledge for validation. Users can earn rewards after deducting the node operation fee. Certain risks, like the counterparty risk, are also associated with this method.
Pooled Staking
Pooled staking or staking pools is a method of Ethereum staking where multiple users combine their assets to make up the 32 ETH threshold necessary to activate the validator. While users can stake as little as 0.01 ETH, the rewards they receive are proportional to the amount of ETH staked in the pool.
Similar to Staking-as-a-Service, power is delegated to the service providers so that the validator node can operate properly. Furthermore, users don’t have to create validator keys because multiple users operate under a single validator.
The rewards for staking ETH vary greatly depending on the method used for pooled staking. Many pooled staking services offer liquidity tokens representing the staked coins. These tokens can be used in DeFi applications as collateral and can be traded when exiting the pool. The risks associated with this include counter-party, execution risk, and more.
What Stake Ethereum?
Staking Ethereum presents an opportunity to generate additional income and leverage idle tokens effectively. Staking represents a low-risk venture where users can simply stake their coins and receive rewards in return. Unlike the fixed rewards in the proof-of-work consensus mechanism, the proof-of-stake mechanism determines the value of a block based on the number of active validators in the network and the total amount of staked funds in the Ethereum protocol. Users can expect an annual earning of anywhere between 4% to 20%.
Conclusion
Ethereum staking has emerged as a great avenue for users to earn passive income and maximize the potential of ETH coins. By committing the coins to uphold the integrity and functionality of the Ethereum network, users can not only secure their assets but also earn rewards in the process.
