Ethereum’s transition from Proof-of-Work to Proof-of-Stake is already underway.
In fact, users have already deposited over 10 million ETH which is currently worth $35,182,464,901 into the staking contract to earn passive income.
This number is likely to increase as the transition is completed, but you don’t need to wait for full implementation to start staking Ether.
Here’s a simple five-step process to start staking and earning yield on your ETH collection.
1. Select a Staking Strategy
There are two ways to stake ETH and the choice boils down to how much ETH you’re willing to deposit.
The Ethereum network requires a deposit of 32 ETH to activate validator software.
That means you’ll have to deploy digital assets worth roughly $131,450 to get started.
If you can meet that requirement, you can start staking solo.
If you don’t have 32 ETH, you can still participate through a pool.
These staking pools aggregate ETH from a community of users to make the process more accessible for everyone.
If you deploy ETH through a pool, you can get started with as little as $10.
For most users, this strategy is clearly preferable.
2. Download Software / Sign Up for an Account
If you have 32 ETH to deploy, you can head to Staking Launchpad, the network’s official platform for validators.
There, you find out if your device meets minimum requirements to run an active validator node and download validator client software to get started.
If you have less than 32 ETH, you’ll need to select a pool and make an account.
Most mainstream crypto exchanges offer pooling services.
Coinbase, for example, requires a user profile and some basic identity verification to get started.
This method means the exchange will hold your crypto in custody and deploy it to the staking smart contract on your behalf.
Alternatively, you could select a staking service listed on the Ethereum.org website to find the right pool for you.
3. Deposit ETH
Once you’ve created an account with a pool or downloaded the validator node client software, you need to deposit ETH.
Solo stakers can verify the target address via Staking Launchpad.
Pools will give you instructions about completing the deposit.
You can use trusted platforms like Etherscan or Consensys (which are recommended by Ethereum developers) to verify the staking address before completing the transaction.
4. Earn Rewards
Once you’ve completed the deposit, the staking rewards should flow to your crypto wallet seamlessly.
Crypto exchanges and pool services might make deposits to the wallet associated with your user profile, while solo validators can expect rewards to flow directly to their online wallet, hardware wallet or browser extension like MetaMask.
At the time of writing, the average yield for staking via a pool is 4.51%.
Solo stakers can expect an annual yield of roughly 5.07%.
Pros of Staking Ethereum
1. Passive Income
The most attractive aspect of the Proof-of-Stake consensus mechanism is the ability for any
user to generate passive income.
Most long-term investors have held their digital assets for years without using it.
Now, they can unlock value and generate yield by staking their passive holdings.
2. Environmentally Friendly
According to Ethereum’s founder Vitalik Buterin, the transition from PoW to PoS will cut the network’s energy usage by over 99%.
This is a reasonable estimate because the new model eliminates the need for computing power or constant mining on the network.
Instead, a simple smart contract does all the heavy lifting and keeps the network operational.
As we face global energy issues and a long–term environmental crisis, Ethereum’s transition to a more energy-efficient framework is crucial and represents a positive movement both from a commercial and an environmental standpoint.
3. Deflationary Pressure
Unlike Bitcoin, there’s no limit to the supply of Ether.
However, staking takes some supply off the market, creating deflationary pressure.
At the time of writing, roughly 9% of Ether’s total supply is locked in the staking protocol.
As this number expands, the amount of Ether in circulation will decline which could make each token more valuable.
Cons of Staking Ethereum
1. Temporarily Unable to Withdraw
According to Ethereum.org, solo stakers won’t be able to withdraw their stake until the mainet is fully merged with the Beacon Chain.
This merge is expected to be completed in 2022; however it has been delayed in the past.
If you’re staking 32 ETH directly, you need to be aware of this limitation.
2. Potentially Less Decentralized
There’s an ongoing debate about the impact of this transition on the network’s decentralization.
While PoS mining is open to anyone willing to make the upfront investment in hardware, PoS shifts the balance of power to the users with the biggest accounts (i.e., the wealthiest).
The 10 largest ETH accounts hold roughly 23.7% of the network’s total supply.
Put simply, these so-called “whale accounts” could have an outsized influence on the future of the network.
3. Unknown Vulnerabilities
PoW has been around for longer than PoS.
The traditional model of crypto consensus has stood the test of time, but staking could have vulnerabilities that we’re not yet aware of.
Investors and users should be aware of this risk.
Is it a good idea to stake Ethereum?
Whether or not staking Ether is a good idea depends on several factors.
If you already hold ETH in your portfolio for the long-term, staking it could be a way to amplify your returns.
After all, it’s a quick and convenient way to generate passive income from an asset that just sits in your portfolio.
However, staking isn’t risk-free or necessary.
If you’re looking to safeguard your assets, holding your crypto in cold wallets could be the most conservative approach.
Also, the 5% yield on staking may not be enough to justify putting your assets on stake.
There could be better opportunities out there for income-seeking investors.
Frequently Asked Questions
- When will the Ethereum network upgrade to proof-of-stake?
The Ethereum development team has already made progress on this transition. In fact, 9% of ETH supply is tied up in the staking protocol right now. However, the merge of the mainnet with the Beacon Chain is expected to be completed in mid-2022. This timeline has been delayed in the past, so users should be prepared for unforeseen delays and complications in this process.
- How much can you earn by staking Ethereum?
The yield on staking Ethereum is variable. If you’re a solo staker, you could expect roughly 5% in annual yield. If you stake through a pool, your total yield could be lower depending on the fees you pay for the pooling service. Over time, your actual yield will depend on the value of ETH and the portion of ETH supply held in staking protocols.