How to stake Ethereum?
Every cryptocurrency has specific characteristics, which sets it apart from the others. One of these characteristics is staking. Ethereum is one of the cryptocurrencies which you can stake with, however only since version 2.0 that was finally released in 2021.
In order to learn more about ETH 2.0 staking, we’ll cover all the points related to this topic. It will allow you to fully understand the mechanics of Ethereum staking and how you can participate.
First things first: buy some ether (ETH)
If you haven’t already done so, don’t forget to acquire some ether if you want to stake Ethereum! Sounds obvious, but this is the first step and no matter how many other cryptos you have, as long you have some ether you can stake.
Ethereum’s transition from proof-of-work (PoW) to proof-of-stake (PoS)
You can stake on the Ethereum network thanks to the change in consensus mechanism which validates transactions on its network. When Ethereum was created it functioned using a proof-of-work mechanism, just like Bitcoin.
PoW is a very secure protocol, but it consumes a lot of resources especially when the network is heavily used. This in turn leads to congestion, which affects transaction speeds and increases fees.
Ethereum’s developers were already anticipating this problem whilst creating this digital asset. However, they found it easier to launch this cryptocurrency with a proof-of-work consensus, despite the team already having the ambition to eventually operate the network using a proof-of-stake.
Even in 2021 Ethereum operated under a PoW mechanism. However, since the end of 2020, users were been able to ‘stake’ ether on the network so they could become a future validators once Ethereum 2.0 (using PoS) was finally operational.
What you need to stake on Ethereum 2.0
Ethereum 2.0 requires you to own 32 ETH as well as ‘blocking’ (i.e. staking) them on the network. However, with prices of Ethereum having increased significantly since the end of 2020, developers have presented other options for those who cannot afford to acquire 32 ETH.
Option one: you have 32 ETH
If you have the required 32 ETH, then you can become a “full validator” on the network. This will allow you to fulfill this role on your own and obtain all the advantages (and disadvantages) associated with it.
Option two: you have less than 32 ETH
Unfortunately, owning 32 ETH, especially at current prices, makes it unlikely. If you bought an average of 32 ETH at £1,500, you would need £48,000 to become a full validator on the network, which is too much for most people.
This is why developers came up with the solution of staking pools. By joining other users in a similar plight, you can each pool your digital assets to reach the total amount of 32 ETH. The rewards will then be allocated to each user in proportion to the tokens held in the pool.
What do you gain by staking ether (ETH)?
Staking is defined as a reward for locking up your ether (ETH), and of course this reward is paid to you in Ethereum’s currency – ether (ETH). The percentage awarded varies depending on a range of factors.
However, the following information is important to note:
- Rewards. When you help the network reach consensus, you earn rewards. You can get it every time you validate a block or whenever you check that other validators provided correct information when validating their blocks;
- Penalty. However, it is also possible to lose ethers if you do something bad on the network. For example, if you approve a non-compliant transaction, find yourself offline or if you do not validate the transaction given to you, then you may lose the ETH that you have staked.
This is how the system encourages all network users to be honest. In addition, security is very important because in theory you need to own more than 50% of the ETH stakes on the network to successfully manipulate transactions, which is in practice impossible due to Ethereum’s value – you would need billions of pounds to do so.
What are the disadvantages of staking on ETH 2.0?
Drawbacks can quickly mount if you do not fulfil your role as a validator. You will be punished by losing some of your ETH staked on the network.
If you are a full validator, this shouldn’t be a problem, as you are the only one responsible. However, where you find yourself in a pool with another member (or more) you need to make sure they are fulfilling their role properly. You risk being sanctioned for the behavior of that individual.
Another downside is when you stake ETH you are not as flexible as when you do not, this means selling ETH can be a bit more of a hassle.
What will the move to proof-of-stake bring to the Ethereum network?
The switch from proof-of-work to proof-of-stake brought several advantages to the Ethereum network:
- Increased speed, since it was no longer necessary to process the entire blockchain for each transaction
- Huge energy savings, because the PoW was very resource intensive. This prevented Ethereum from becoming an ecological disaster
- Lower transaction costs, due to the complexity of validating transactions
- Increased security, increasing with the number of validators on the network
The development of many crypto projects are based on the Ethereum blockchain. PoW, limited by the low number of transactions per second (about fifteen), slowed operations down for these projects and caused high fees during network congestion.
Are there any alternatives to staking ETH tokens during the transition period?
Some people want to become validators, but do not want to stake their ether for an
indefinite period. As a result, they are reluctant to take part in the network verification process. Fortunately, there is an alternative that has been offered by Binance, one of the most reputable exchanges in the industry.
If you use the system set up by Binance to stake your ethers, then you will receive a BETH token equivalent, which is worth exactly one ETH. As long as your ETH tokens are blocked, you can use BETH tokens as you would with ETH. Therefore making it possible to trade or make withdrawals with this digital asset.
Once the first phase of Ethereum 2.0 deployment has taken place and sharding is in place, it will then be possible to exchange your BETH for ETH if desired. Keep in mind that this can take a long time and it will likely take at least two years for the Ethereum network to complete these steps.
While your tokens are blocked on Binance, the staking rewards will be returned to you in the form of BETH, which will also be possible to exchange for ETH. So you don’t lose any benefit by using this Binance feature.
Conclusion on the staking of your ETH tokens
We hope you enjoyed our explanation of ETH token staking and that you now have a better understanding of how the system that will be set up by the Ethereum network in the future works.
To obtain precise information on the gains or penalties that will apply when you become a validator on the network, you will have to wait, however, because no official communication has been made on the subject at present. This will probably only be the case once Ethereum 2.0 is fully functional.
To become a full validator, you need to staker 32 ETH. However, if you don’t have this amount, you can join a pool. If you don’t want your tokens to be blocked on the network, you can also use Binance’s option which will allow you to continue trading and withdrawing with a substitute BETH token until sharding is deployed on Ethereum.
If you wish to obtain additional information on this crypto asset, we invite you to consult our other Ethereum guides!
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J'ai découvert le monde des cryptomonnaies en janvier 2018. Arrivé au pire moment pour investir, je n'ai depuis lors jamais cessé de me former et partage désormais mes connaissances afin de faciliter l'adoption des cryptos.
The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.