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Ethereum Staking: The Stuff ETH Miner Nightmares Are Made Of?

5.0 | by Valerioshi X

You hear that? Bend your ear and listen closely. That’s right. That's the collective wailing of 1 million ETH miners flailing their arms toward the burning red sky. "Will The Merge finally take place?" They yell in despair at the stars. "Is the end of Ethereum mining finally nigh?"

Miner or not, if you've got any ETH sitting around, you might want to pay attention. Ethereum staking has been the talk of the block for what feels like forever now. Major and minor upgrades are scheduled at different stages, the most important of which is The Merge. In a nutshell, the advent of Ethereum 2.0 is nigh. 

But why not design Ethereum to operate as a single layer from the get-go? Well, the Ethereum blockchain, in its present form, has several serious bottlenecks. And surprise, surprise! They're all addressed in the original Ethereum whitepaper. 

In it, our ETH lord Vitalik Buterin introduces what is now known as the Trilemma problem. He proposes that you can have scalability, decentralization, and security, but not all three at once. And this is pretty much the challenge that all these altchains have been trying to resolve. So Eth 2.0 isn't just a transition to Proof-of-Stake (PoS) from Proof-of-Work (PoW); it's a network upgrade that's about scaling Ethereum by reducing costs and increasing speed, without compromising security.  

Let's look at how staking fits into this lofty goal. 

 

What is Ethereum Staking?

© sydaproductions

What is staking anyway? To date, Ethereum users have mostly been involved with the PoW consensus mechanism. (That's the original consensus mechanism used by Bitcoin for securing the blockchain network). With the launch of the Beacon chain, a parallel chain to Ethereum, the network introduced PoS alongside PoW... that is, until The Merge happens, which is when PoS will take over completely. 

But what does staking Ethereum—or, more accurately, the Ether token (ETH)—mean for the network? The name gives us a hint. Your "stake" is your investment in the network. By locking up your ETH in a smart contract for a specific period of time, you help secure the blockchain. In exchange, you receive rewards in ETH on the Ethereum 2.0 chain (also known as the Beacon Chain).

But why switch to staking at all? Well, the PoW mechanism is considerably more energy-intensive. And that's not counting the minimum hardware requirements, which can run you several thousand dollars. PoW has also caught some slack from the mainstream media lately due to its environmental impact. 

Back to Ethereum's 99 problems real quick. If you've used the network, then you know that ETH transaction fees can be out of this world. This of course hinders transaction volume, and gives Ethereum a bad name. What many critics don't realize is that Ethereum 1.0 was purposefully designed this way (That's what you get with an auction-based model, which encourages competitive bidding). This design ensures that users compete to get included in the next block of transactions. 

This is why the Ethereum Foundation has put out an ambitious roadmap. This development path includes the Beacon Chain, sharding, and EIP-1559. 

Real quick: EIP-1559, which has already taken place, switched the incentivization model. Upon implementation, the base fee was burned, instead of going to miners. The miners would thus receive the transaction fees and tips. In essence, EIP-1559 kicked off what we can hope is an increasingly deflationary total circulating supply of ETH. 

 

Staking Ethereum: The Centralized Exchange (CEX) route 

© Ajay Suresh | Flickr

When it comes to Ethereum staking, Coinbase is one of the most popular centralized exchanges (CEXs) to offer this feature. Keep in mind, Coinbase requires you to lock your ETH until the transition to Ethereum 2.0 (That's when The Merge takes place, supposedly some time later this year, so this isn’t a requirement that’s unique to Coinbase, but rather, a design of the Ethereum network itself). 

Btw, the annual reward rate is based on a floating rate, so expect your staking rewards to decrease over time. This, too, is standard across all protocols, and isn't unique to Coinbase. While Coinbase is known as a CEX that caters mainly to U.S.-based customers, many countries around the world are eligible to participate in their ETH staking product (Here's a complete list).  

But let’s say you’re allergic to Coinbase, yet you still want to use a CEX. Kraken is another CEX that’s popular for providing ETH staking services, but with a couple of notable differences:

  1. Like Coinbase, Kraken provides ETH staking services to North American residents as well. However, unlike Coinbase, Kraken offers its customers the ability to trade their staked ETH, so they can put up their stake as collateral, and leverage their assets. 

  2. Before you get all excited and put your big boy or big girl pants on, know that if you’re a U.S. or Canadian resident, you’re fresh out of luck. Thanks to your financial regulators wanting to “protect your investments”, you won’t be able to gain access to this service at all. (Sorry!)

Before we end here, let me say that I'm not a fan of custodial staking (Not your keys, not your coins). The Coinbase / Kraken CEX route is best suited for crypto heads who aren't quite comfortable messing around with decentralized finance (DeFi) protocols just yet. 

Sure, locking your ETH up in a smart contract, where there's no central authority (ergo, no customer support), can be an intimidating prospect. But keep in mind, Coinbase and Kraken ultimately interact with the same ETH staking smart contract as everybody else. 

Just my two sats.  

Staking Ethereum: The DeFi Route

But what if you want to go direct? Ever heard of Lido Finance? Staking with Lido is done via LidoDAO, a decentralized autonomous organization (DAO). Specific LidoDAO members are ETH node operators, who you can stake your ETH with.

This approach presents three main advantages:

  1. You don’t lose liquidity, despite locking in your ETH. You can still trade and use your ETH as normal. Wondering how this works? Well, when you stake ETH with Lido, you actually receive Lido-staked ETH (stETH), which can be used like your regular ETH in other DeFi protocols.

  2. You don’t have to worry about running special validator software or anything of the sort. All you’ve got to do is follow the Lido ETH Staking guide here to get set up with MetaMask, and off you go!

  3. There is no minimum stake. However, note that staking more than 32 ETH will mean that your ETH stake will be batched by 32 ETH for every LidoDAO node operator involved.

Finally, if you’re ready to stake significant amounts of ETH (32 or more), you can stake as a solo validator. If you have a lot less, you can always choose to stake with a mining pool. 

As a validator, you're responsible for processing transactions and adding new blocks to the Beacon Chain. I like staking with mining pools, though. That's because the minimum requirement to become a validator is 32 ETH tokens, so joint staking is more my cup o' tea.

Moreover, acting as a validator requires that you assume several duties. Failing these can result in penalties, exercised as slashed ETH. (No thank you! I like my ETH.) Node operators must also have an uptime of 99.9% after installing validator software. Yes, this means that offline validator nodes can incur penalties. 

So staking in a mining pool with a trusted validator is a solid alternative path if you're a little scaredy-cat like me (Meow). And I've already mentioned this before, but it's important to bear in mind - when you're staking ETH in a pool, your staking rewards will be issued in the form of a tokenized version of your locked ETH.  

Anyway, here's a list of all the Ethereum staking pools. Happy browsing!

How to Make Money Staking Ethereum

© Ron Lach  | Pexels

How much can you make staking Ethereum? That depends on several factors, such as...

- How do you want to stake

- Who you might want to stake with

- The amount and time you want to lock your ETH up for.  

As for the inflationary rate, if the total amount of ETH staked is low, then the issuance rate declines as well. Conversely, as the amount staked rises, so too does the issuance rate. This approach encourages smaller ETH stakers to stake more ETH. 

Pretty smart design, eh?   

Pro tip: Need to calculate how much profit you can make by staking your ETH? Use this advanced Ethereum staking calculator. It spits out key metrics like network share percentage and annual percentage rate (APR).

Ethereum Staking: Where to go from here

© vjkombajn | Pixabay

From solo staking to mining pools and CEX staking, Ethereum has come a long way since its inception. To think that the very first blockchain with smart contract functionality could come this far in just a few years is nothing short of remarkable. 

If you've been mining ETH like yours truly, then staking has been a double-edged sword. On the one hand, we're losing sleep sweating over all our GPUs, and what we might do with them once the switch over to Ethereum 2.0 is complete (Check out my guide on "How to open an Internet gaming cafe'" and other terrible ideas for miners in the Post-Mining era). 

It's not all bad, though. All that ETH we've mined? Now we can stake it for compound growth. Think about it. We make money from mining ETH. Then, we make more money from staking that mined ETH. And what else can you do with all those rewards? Compound them upon compounding interest upon compounding interest... you get the idea.

© Valerio Puggioni | HODL Content

To be fair, I've got a penchant for the dramatic when we're talking about mining. Do I see visions of landfills with abandoned GPUs? Sure, but I'm a terrible oracle (I'm no Chainlink). 

So if you're an ETH miner, be confident there are other tokens that will become profitable. After all, all that hash power has got to go somewhere. (My bet is on ravencoin, but hey, who knows?) And that's not mentioning all the delays with the Ethereum Merge, so there's a chance it might get delayed yet again. But one thing does remain certain: The Merge will herald a significant shift away from the PoW consensus mechanism, and with it, considerable hashing power. Where all that goes remains to be seen.

 

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Valerioshi X
Valerioshi X

Valerioshi is the 4th president of X+, one of the most exclusive communities in web3, for holders who hold 10 or more DeGods. Along with the burn team, he led the CryptoPunk burning campaign for DeGods, successfully raising more than US$100,000 in under 30 hours. He runs Degen Reports, and is host of The Degen Hour as well as the X+ Sigma Lounge, both weekly Twitter spaces. Follow the author on Twitter @valerioshi_

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