Just as Bitcoin pioneered the concept of sound decentralized money, the Ethereum network spearheaded decentralized applications (dApps). Powered by smart contracts, dApps render obsolete banks, exchanges and other financial services that can be logically codified.

To participate in this new decentralized finance (DeFi) landscape, users can take a stake in Ethereum. Not too dissimilar from being a company shareholder, Ethereum staking provides rewards while also securing the network.

What Is Ethereum Staking?

Whether it is Bitcoin mining or Ethereum staking, both are at the core of blockchain networks. Specifically, public blockchains rely on decentralization to be successfully monetized and self-sustainable. After all, for users to become a part of the network by running a computer node, they have to be rewarded for doing so.

Ethereum staking is one such incentivization mechanism. Here is how it works:

  • Blockchain networks can be decentralized if there are nodes working together to sync up and relay the status of the network. This status is the public ledger tracking all transactions, visible on Etherscan.io in the case of Ethereum.
  • In charge of coordinating the public ledger is the consensus algorithm, as a part of software installed on all network nodes. After The Merge, Ethereum transitioned to proof-of-stake from proof-of-work consensus. This lowered its energy footprint by approximately 99% because nodes update the network via economic staking instead of physical computing.
  • Using their stake (the amount of ETH), node validators verify transactions as non-fraudulent and add them as new data blocks on the ledger. When they do so, validators receive ETH as a reward for their validation service.

In short, Ethereum staking is the reward for guaranteeing that the network's transactions are legit. On the user side of the equation, they pay this reward as ETH gas fee. However, once ETH is locked in as a stake to secure the network, there is a lockup period to consider.

Here are some of the best options at your disposal:

Lido: The Most Popular Way To Stake Ethereum

As of yet, the Ethereum Foundation hasn't announced the date when the lockup staking period will end, but it will happen with the Shanghai upgrade sometime next year.

Ethereum validators calculate Ethereum staking as annual percentage yield (APY) percentage, the metric used in banking when depositing funds in a savings account. Another measure is the annual percentage rate (APR), which just means interest rate yield without the added compound interest.

Post-Merge, Ethereum validators can earn around 4% APR. Here is what the Ethereum 2.0 staking looks like in terms of raw numbers:

Ethereum Beacon Chain Deposits
Ethereum Beacon Chain Deposits Dune

As you can see, outside of regular ETH staking, there is another form of staking called liquid staking. Lido Finance platform popularized it because it eliminated Ethereum's minimum requirement of having 32 ETH staked for block-generating validators.

How To Start Staking With Lido

Lido provided an alternative with liquid staking in which they peg your ETH to staked Ether (stETH) in a 1:1 ratio, just like USDC stablecoin is pegged to the dollar. Not only can liquid stakers commit any ETH amount, but they can also unstake their ETH at any time.

Therefore, Lido's liquid staking solves three problems for Ethereum users in the pre-Shanghai phase: illiquidity, accessibility and immovability. Because of this flexibility, it is called liquid. When people stake their ETH with Lido, they receive about 5.4% APR as stETH.

When Lido stakes your ETH on Ethereum, its smart contract accumulates all Ethereum's execution layer (EL) rewards, re-stakes ETH and then mints new stETH. Without having to wait for validator activation, Lido staking rewards come 24 hours after the first deposit.

Speaking of which, to start liquid staking on Lido, you have to have a wallet filled with ETH first. The most popular non-custodial wallet as a browser extension is MetaMask. You can buy ETH on any major exchange, such as Binance or Coinbase, and send it to your MetaMask wallet address. Once that basic requirement is fulfilled, go to Lido staking and connect your wallet.

Staking on Lido
Staking on Lido Lido

As you can see, Lido is as simple and as convenient as it gets. On the "Rewards" tab, you can review your balance and total stETH earned. Compounding interest rates on Ethereum, as APY, will only be possible after the Shanghai upgrade, which enables withdrawals of locked ETH. Therefore, Lido offers an APR interest rate only.

For 5 ETH staked, at about 5% APR, the estimated earning in one year stands at $332, based on the ETH price on Sept. 29. In three years, this is just over $1,000. Given that the national average interest rate for savings accounts in banks is 0.13%, this is a superior way to make safe passive income.

However, do note that Lido retains a 10% service fee from your staking returns, which covers the platform's running expenses. Additionally, the APR is variable, depending on the number of people engaged in liquid staking. Therefore, if there is a sudden influx of new stakers, Lido APR will go down.

Is Lido Staking Safe?

Just like cryptocurrency exchanges Binance, Coinbase or Kraken, Lido is a centralized mediator. This means that Lido holds your funds' signing key. This is necessary for Lido to act as a validator on the Ethereum network.

In turn, this makes Lido a semi-custodial platform because the user can still withdraw assets and stETH via MetaMask. Case in point, this was not possible when Celsius Network suspended withdrawals and eventually went bankrupt.

Liquid staking is an alternative to locking up a user's stake. It allows users to stake any amount of Ethereum and to effectively unstake their ETH without the requirement of transactions being enabled.

Likewise, all potential Ethereum 2.0 vulnerabilities transfer to the Lido platform as well. With that said, Lido's smart contracts are open-source and regularly audited.

Rocketpool: The Decentralized Way To Stake Ethereum

Lido may be semi-decentralized, but Rocketpool is built from the ground up as a trustless staking platform. RPL node runners have to stake 16 ETH to become a part of the platform, while regular users have to only stake 0.01 ETH to become eligible.

Equivalent to Lido's stETH, Rocketpool delivers rETH, a liquid token pegged to ETH that frees it for trading on dApps. Rocketpool's native governance token, RPL, powers its decentralized staking ecosystem by rewarding node operators. Likewise, RPL tokenholders get to vote on the platforms' rules.

Presently, Rocketpool delivers 4.86% APR, with a transaction cost of 0.00184 ETH (approximately $2.5).

To start staking with Rocketpool, simply go to Rocketpool stake, connect your MetaMask wallet and transfer ETH to start receiving rETH within 24 hours.

Staking on Centralized Exchanges

An even more convenient way to stake ETH is to use crypto exchanges. After all, they cover the bulk of crypto traffic as it is and have the most users.

Here are the top 4 Ethereum staking platforms, according to their annual percentage rates. Binance and Coinbase follow Lido's footsteps with their own versions of staked ETH tokens:

  • Binance: 5.02% – For Ethereum 2.0, Binance launched bETH, a wrapped BToken that is pegged to ETH, just like Lido's stETH.
  • Coinbase: 3.28% (as APY, which may not be available for U.S. citizens) – Coinbase's wrapped token is called cbETH, allowing users to trade with liquid ETH just like with bETH and stETH.

Is Ethereum Staking Worth the Effort?

These are the largest and most trusted exchanges with deep liquidity. Accordingly, even if they suffer a hack, they most likely have sufficient funds to reimburse damages. The downside is that they hold your funds in proprietary wallets, so they control your crypto assets.

Ethereum
Ethereum Bastian Riccardi/Unsplash
Read more