Ethereum Staking: How To Stake ETH Securely
|— Crypto staking is a key aspect of how Proof-of-Stake blockchains like Ethereum stay secure: To validate transactions, users must lock up 32ETH which acts as collateral if they behave badly, but they also receive rewards as an incentive to behave honorably.|
— All methods of staking ETH involve earning crypto rewards, but some ETH staking methods offer higher rewards than others.
— Whichever staking method you choose, it’s important to DYOR, as staking can involve centralization risks, smart contract risks and more.
Did you know your cryptocurrency can do more than just rest in your digital wallet?
Welcome to the realm of crypto staking, where you can generate passive income on your crypto funds.
You might be thinking “Great! Free ETH! What’s the catch?” and, while there isn’t exactly a catch, it’s not as simple as meets the eye. For starters, crypto staking isn’t just for passive income, it’s for actively contributing to the security and operations of a proof of stake blockchain network.
Staking provides the security model for Proof-of-Stake (PoS) networks like Ethereum. Put simply, participants lock up a certain amount of their cryptocurrency holdings, known as a “stake”. Then these funds act as collateral allowing them to validate transactions. If they behave well, they receive rewards and if they behave badly, their stake is slashed. This keeps the network safe and secure. But there’s a bit more to it than that.
Before you dive into staking all your ETH, it’s essential to unravel the mechanics that power it. In this article, Ledger Academy will take you through exactly how staking on Ethereum works, the benefits and risks, and how to stake ETH securely.
Ethereum Staking: What Is it About?
Ethereum is the second most popular blockchain today. In fact, since its transition, it’s the most popular network using a Proof-of-Stake consensus. Plus, since the network is so popular and it supports smart contracts, it’s perfect for – not just native staking – but all sorts of staking apps and platforms. As such, Ethereum’s staking ecosystem is huge and multifaceted.
The Ethereum Proof-of-Stake system works like many others on the surface. To become a validator, you must stake 32ETH and the funds act as collateral. If you attempt to undermine the system or fail to validate accurately and reliably, you risk losing their staked ETH investment. The staking requirement encourages validators to act in the network’s best interests.
The reason so many people stake ETH is to earn a passive income. To explain, becoming a validator, or even just funding one, doesn’t require high-performance hardware. So you can start earning rewards with ease.
But before we get into the technicalities, let’s go back to the beginning and explore the origins of Ethereum staking.
History of Staking on Ethereum
Staking on Ethereum was not always possible. At its inception, Ethereum relied on a Proof-of-Work consensus mechanism, similar to how Bitcoin functions. However, in September 2022, it transitioned to its current mechanism; Proof-of-Stake.
This was no easy feat. To make the transition, it relied on the creation of a new chain; the Beacon chain. This new Proof-of-Stake chain started out by accepting blockchain transactions from the original proof-of-work Ethereum network. However, to achieve enough decentralization to support the entire network securely, it needed more validators. So, while the beacon chain amassed these new validators, it only allowed the validators to stake and not withdraw. This guaranteed an increase in validators.
By September 2022, the Proof-of-Stake chain had gathered enough validators to support the whole Ethereum network in a decentralized manner. So the existing Ethereum clients deactivated their mining, block propagation, and consensus logic and these tasks henceforth became the responsibility of the Beacon Chain. Meanwhile, this PoS chain joined together with the rest of the original Ethereum network in an event known as the Merge.
While Ethereum used the Proof-of-Stake consensus mechanism from that point onwards, the transition was only finalized in April 2023 with the Shanghai upgrade. This important network event finally allowed validators to withdraw their staked ETH and cash out on the rewards.
Today Ethereum works as a fully-fledged Proof-of-Stake chain, meaning you can stake and unstake ETH as you’d like.
How Does Staking Work On Ethereum?
There are a few key stages of staking on Ethereum: Staking, validating transactions, receiving rewards or punishments, and then unstaking your ETH. Here’s how it works:
Staking Your ETH
Staking on Ethereum involves participating in a process that helps secure the network and validate transactions. For starters, any user who wants to become a validator must generate a key pair, a private and public key. These are known as their “validator keys” and they are responsible for identifying the validator and handling reward collection. It’s these keys that any validator will need to sign messages and participate in consensus activities.
From there, the user must lock up a minimum of 32ETH in a special smart contract called a “deposit contract”. This initiates the validator’s participation in the staking process.
Here’s where it gets a little technical. Earning Ethereum staking rewards involves validating transactions. So how does that work exactly?
On the Ethereum network, time is measured in Epochs, which typically last 6.4 minutes. Each epoch has its own validator set, determined by which validators stake the most ETH. Each of these epochs consists of smaller time increments called slots, which typically last around 12 seconds.
Within these 12-second periods (or slots) validators take turns in proposing blocks. When it’s a specific validator’s turn, they gather transactions under a new block header, then sign them with their validator key. If there are no blocks proposed within a specific slot, the validators attest to the validity of blocks proposed by other validators. To do so, they use their validator keys to sign their support for the block’s validity—just like they would propose a block.
At the end of each epoch, the validators receive their rewards (or punishments) and the active set rotates. This means new validators with enough stake get their chance to propose blocks and receive rewards, while poorly performing validators are removed from the set. This encourages decentralization, as it ensures no single validator has too much power.
ETH Staking Rewards and Punishments
The amount of ETH staking rewards isn’t fixed and can vary depending on the number of validators participating at any given time. When there are fewer validators, the protocol increases rewards to encourage more people to stake.
Then slashing, on the other hand, is a severe penalty aiming to punish ineffective validators. To explain, if a validator’s stake is slashed, it means they lose a portion of their staked funds, and could even lose their role as a validator. These penalties are awarded to validators who propose and sign two different blocks for the same slot, attest to a block surrounding another one, or if they “double vote” two different candidates for the same block. In these instances, 1/32 of a validator’s staked Ether is immediately burned, and a 36-day removal period begins, during which their stake gradually reduces.
So, now you’ve been validating transactions and earning rewards, but what about withdrawing your staked ETH and rewards? If you want to actually use your rewards, you’ll have to withdraw your stake. So how does that work?
Well, firstly, you must give the system an address to send your stake, and your rewards to. While some validators set this up when staking in the first place, others didn’t, so this is a key step if you actually want to reap those rewards.
Next, you have to initiate the unstaking process, because unfortunately, you can’t just withdraw your stake then and there. A validator who would like to withdraw their stake on Ethereum, must first submit a withdrawal request to the network. Then, they must wait out the “withdrawal period”, consisting of a minimum of four epochs. After enduring this withdrawal period, validators may move into the exit queue, but this may take some time, as only 16 validators may exit within each epoch. That means if lots of validators want to withdraw their stake at once, they may wait a while in the exit queue.
It’s important to note that once you initiate this process, you will no longer have the power to process or validate transactions and you will stop receiving rewards. That said, once the process is complete, you’ll receive your stake back along with all of your rewards.
Ways to Stake ETH
So now you know all about how staking works on Ethereum, how about staking ETH yourself? Well, there are actually a few different ways to stake ETH and not all of them require a 32ETH investment either. If you want to earn passive income by securing the second most popular blockchain network of all time, there are a few different ways to do so.
Taking part in solo staking (also known as native staking) means becoming a validator yourself. Essentially, it is a way to participate by helping to validate transactions and secure the network. Instead of relying on others to do this job, you take on the responsibility yourself, and earn all of the rewards that come with it.
To become a solo staker, you need to invest a minimum of 32 ETH. This acts like collateral to make sure you validate transactions effectively. But that’s not all you will need. You’ll also need a computer that is connected to the internet all the time. This computer must run the Ethereum client, which is essentially the software containing the whole blockchain’s information. If the computer you use doesn’t perform correctly, your stake could be slashed. This means solo staking comes with the burden of responsibility, plus, the barrier to entry is quite high.
That said, Solo staking on Ethereum represents the gold standard for staking. While it comes with more responsibilities than other methods, it also comes with much bigger rewards. Taking on the staking job yourself means you don’t have to share those precious rewards with any other participants.
However, if ongoing responsibility sounds too much for you, it’s not your only option.
Staking as a Service
Staking as a Service allows you to delegate the staking process to a third-party provider, meaning you can earn rewards without managing your own validator node. This is also known as “funding a validator” and it allows you to leave the more technical aspects of staking to someone else, while enjoying the benefits of native block rewards. With this type of staking, you will still need to set up your validator credentials, generate your keys, and deposit your 32 ETH. However, from there, the service will validate transactions on your behalf.
While it offers convenience, this type of staking also involves trusting a validator with your funds. If they behave badly, your rewards will be slashed too.
Of course, fees are another aspect to take into account. To explain, the entity offering this service is doing so to make money themselves. Like any business, they will be using your funds to make a profit. This means you might not be getting proportional rewards to your stake.
That said, there are countless trusted staking as a service providers that help non-crypto natives earn passive income on their investments, and some are known to be rather lucrative. Rewards with these services are much better than using staking pools.
While this method is much more hands-off than native (solo) staking, it still has a big barrier to entry, as not everyone has 32ETH to fund a validator with.
So what about methods of staking that don’t require as big an investment?
Like funding a validator, pooled staking allows individuals to earn staking rewards without the need for extensive technical knowledge or running their own validator node. However, it also doesn’t require a 32ETH investment.
Instead of staking alone, you can also team up with other individuals. With this method, the participants can contribute any amount of cryptocurrency to a staking pool. Then the pool’s operator uses the shared funds to participate in native staking. When the operator receives the rewards, it then distributes them to the staking pool participants relative to their initial stake.
Under the pooled staking umbrella comes another interesting sub-category; liquid staking. To explain, some pooled staking platforms offer users tokens in return for their investment. These ERC-20 tokens are known as liquid staking tokens (LSTs) and they are pegged to the value of the initial asset, meaning stakers can still use their locked-up funds in DeFi platforms and blockchain apps. This is a key benefit as most other types of staking require you to lock up funds in a way you can’t use them.
Whichever pooled staking method you use, it’s important to consider the disadvantages. For example, pooled staking requires stakers to trust the pool’s operator. If the operator doesn’t validate transactions correctly, it impacts all of the participant’s rewards. Another aspect to consider is the pool’s trustworthiness. Many staking pools use smart contracts to pool users’ funds, however this poses a risk. If there is a bug in the contract, bad actors could exploit the weakness and potentially access the pool’s funds.
Centralized Exchange Staking
Centralized exchange staking involves the practice of depositing your cryptocurrency assets on a centralized exchange platform to participate in staking activities and earn rewards. This approach offers a convenient alternative to pooled staking, but it also comes with its own risks.
On centralized exchanges, you’re generally forced to use the platform’s custodial wallets. This means they retain ownership of the private keys attributed to your account, and therefore custody over your assets. This can cause a problem if the exchange shuts down or closes their staking operations. In this case, you’re trusting the platform to pay out your rewards and give you access to your funds—which may not always happen.
Benefits of Staking Ether
So now you know all of the different methods of Staking on Ethereum, but what about the benefits?
Potential for Passive Income
The primary advantage of staking Ether is the opportunity to earn passive income. When you stake Ether on the network, you contribute to the validation and security of transactions, and in return, you receive rewards. These rewards are an incentive for participants to actively support the Ethereum network, making staking a means of generating ongoing income without actively trading or investing in other assets.
Relative Network Stability
Staking Ether is also less risky than staking other crypto assets, as its popularity means it’s less volatile than some other cryptocurrencies. As the second most popular network, Ethereum boasts stability, global adoption, and robust security that sets it apart.
Risks of Staking Ether
Staking Ether comes with its fair share of considerations.
Fluctuation Is Inevitable
Even the most stable cryptocurrencies still face market fluctuation, which can significantly impact your staking rewards. For example, if you decide to stake ETH and the price falls, the rewards you receive for staking might not cover the loss from the volatility.
Limited Control of Your Crypto
Next, as long as you’re not participating in liquid staking specifically, your liquidity is essentially locked-up for a period of time, meaning that you won’t have immediate access to those funds. This can be less than ideal when dealing with volatility or market uncertainty.
Trust in Your Staking Platform
Finally, the biggest risk of staking ETH is the platform you choose. Native (solo) staking on Ethereum is generally considered safe—its protocol is well and truly battle-tested. However, other methods of staking come with their own risks. As mentioned, centralized exchanges are controlled by a single entity and retain custody of your funds. Then more decentralized options, like pooled staking use smart contracts, which could potentially be exploited should they have a bug. As a result, it’s crucial to thoroughly research and choose reputable platforms that prioritize the features that align with your risk tolerance and investment goals.
How to Stake ETH
Starting Your Ethereum Staking Journey
Before you start staking, one of the most important parts of the journey lies with research and analytics. It’s good practice to keep a record of how profitable your staking experience is, if at all. Remember—cryptocurrencies are volatile assets, and Ether is no exception.
When taking so many variables into account, you might find a staking reward calculator handy. This valuable tool can give you insightful projections of the rewards you might accrue. All you have to do is input the numbers and these calculators will analyze the financial benefits associated with different staking scenarios.
After that, all that’s left is choosing the method for you, so let’s explain how to stake ETH:
How to Solo Stake ETH
Getting started with solo staking within the Ethereum network involves several key steps to ensure a smooth and secure process.
First, you’ll need to buy some hardware. It is possible to run a validator node on a normal computer, but for peak performance, it’s recommended to dedicate one piece of hardware to validating transactions. From there you’ll have to install the Ethereum “client”, which is essentially the software that runs the Ethereum blockchain. If you have command line knowledge, you can set it up for yourself. Otherwise, you can use Dappnode to set it up for you.
Next you need to sync both a consensus layer client (concerned with maintaining agreement on the state of the blockchain) and an execution layer client (one that deals with smart contract and app transactions on Ethereum Virtual Machine). This means your computer has to update to the most recent copy of the Ethereum blockchain. From there you’ll need to generate your validator keys and deposit 32 ETH to the deposit contract address. This activates your node, which you can monitor and control using your validator keys. For more information, make sure you check out the Ethereum.org docs on how to run a node.
If that seems a little complicated for you—fear not. It’s much easier to stake ETH directly through the Ledger Ecosystem.
How to Stake ETH with Ledger
The Ledger ecosystem offers several staking options for you to choose from. So, no matter if you have a lot of ETH or just a little, there’s an easy staking solution for you. Plus, when staking through the Ledger ecosystem you also get to keep custody of your keys, which is not currently possible via centralized staking platforms.
With Ledger Live, you have a few options to begin earning ETH rewards passively.
Your first option is securely and effortlessly fund a validator Kiln. To get started, launch the Ledger Live app, connect your Ledger device, and head to the discover tab. You’ll be able to choose the amount of ETH you want to stake (just remember it needs to be a multiple of 32). Plus, Kiln will take you through all the necessary steps, including setting up your validator credentials and uploading your signing keys.
If you don’t have 32ETH to spare, you can also access a staking pool via the Ledger ecosystem. Through Lido, you can participate in liquid staking, meaning you can stake whatever you can spare and receive stETH, an LST, in return. This ERC-20 token is pegged to the price of ETH, but is also available for use in other protocols, DeFi apps or blockchain apps. Using this method, you can accrue rewards while using these tokens to continue exploring web3!
Basically, whichever option you choose, staking ETH is completely secure within the ecosystem.
Your ETH Staking Journey
Although staking is exciting, it’s important to remember to DYOR. Doing this helps you make smart choices and avoid potentially expensive mistakes. Staking comes in many shapes and forms, and each of them have different requirements, risks and rewards. Choosing which method aligns with your strategy is imperative if you want to navigate the ETH staking space securely.
Of course, if you’re accruing ETH rewards, keeping those safe is of the utmost importance too. Luckily, staking ETH through the Ledger ecosystem means you can benefit from the security of your Ledger device while knowing you can access staking apps directly from Ledger Live. This secure connection and the trusted display on your device allows you to check the validity of any staking transaction before you dive in. Plus, you can rest easy knowing that the keys that control your account will stay safe and offline within the Secure Element chip.
Ethereum staking opens up exciting opportunities and rewards, but only you have the power to control how you accrue them. Only you have the power to stake ETH however you see fit; because that’s what true self-custody is about.