Ethereum staking refers to the process of transaction validation on the Ethereum blockchain network. This method sees users lock in, or “stake,” the platform’s native cryptocurrency, Ether (ETH), to qualify for validator privileges in order to help secure the network and earn rewards.
What Is Ethereum Staking?
Ethereum staking refers to participation in Ethereum’s transaction validation process following its move to a proof-of-stake consensus protocol. When staking, users lock in, or “stake,” tokens on the blockchain in order to earn validator opportunities that secure the network in exchange for rewards.
In 2022, Ethereum underwent a major transition known as the Merge, when its consensus mechanism switched from a proof-of-work protocol to a proof-of-stake protocol.
To stake Ether means becoming a validator, one of the pillars of proof-of-stake protocols. A validator is an entity who participates directly in Ethereum network consensus by authenticating transactions, creating new blocks on the chain and monitoring for malicious activity. Validators support the Ethereum protocol first-hand, and get subsequent rewards for doing so.
Proof-of-Stake vs. Proof-of-Work
- Proof-of-Stake: Requires crypto staking to operate; uses validators to create new blocks and build out network.
- Proof-of-Work: Requires crypto mining to operate; uses winners of complex, competitive puzzles to create new blocks and build out network.
Staking is quite different from more familiar concepts like investing, Arie Trouw, software engineer and co-founder at XYO Network, explained: While investing in Ethereum is as simple as buying Ether and letting it sit in a wallet as the price fluctuates, staking, on the other hand, allows a user to earn tokens with interest, participate in liquidity pools, lending, yield farming and derivatives.
How Does Ethereum Staking Work?
In short, kicking off Ethereum 2.0 staking and the validator process means a user must stake 32 ETH, then acquire validator privileges and program their staking node accordingly.
In particular, there’s a few core technologies that make Ethereum staking work and are important components of the validator process: Validator keys and epochs.
Validator Keys
Validator keys are the key pair associated with each validator that’s established, and are used to verify validators and associated blocks on the Ethereum chain. Validator keys consist of one public key and one private key, and are each represented as a separate string of random characters. The validator public key is used by the network to identify the validator and deal with reward collection, and is attached to the transaction data when ETH is deposited for the staking deposit contract. The validator private key is used to sign any on-chain actions as a validator, like block proposals and attestations.
Epochs
Once keys and a node are set up, a validator must then wait to be selected to authenticate a transaction in part of the block production process. These are completed in time slots — a fixed time interval of 12 seconds during which a block is formed.
As time slots accumulate, they accrue into epochs, which are groups of 32 separate time slots that are each respectively 12 seconds. This totals 384 seconds, or 6.4 minutes, to form one epoch
The first block of an epoch is known as a checkpoint, which is followed by 31 regular blocks. This process is important to understand algorithmically, since the hash encoding the regular blocks from 2 to 32 refer to the first checkpoint block as its key base, creating a single chain that holds the epoch together.
To complete the validator process, each block within a time slot is voted for by one committee of validators, each having a minimum of 128 members. The maximum number of members is 2,048, however, anything more than that is considered redundant. These 128 (or more) members are automatically and randomly elected to the committee from the general pool of Ethereum validators, fixed for the epoch duration.
Furthermore, each committee is distributed over one time slot, forming 32 committees per each epoch. While one of the committee members validates a block, the remaining members can vote for this initiative. This kind of voting is called block attestation, Eugene Zomchak, product owner at CoinLoan, a crypto marketplace and lending platform, said. If approved, the block will become part of the main chain. At the end of an epoch, validators from the common pool are shuffled to form new committees for the next epoch. In total, there are at least 4,096 members per committee across 32 committees, equaling 131,072 Ether per epoch, Zomchak estimated.
The process rinses and repeats in entirety, ranging from a few seconds to several hours depending on network congestion.
Ways to Stake Ethereum
There’s three main ways to stake Ethereum on the protocol, giving users options on how they would like to earn rewards and go about the staking process as a whole.
Solo Staking
Solo staking means being an individual validator on the Ethereum network. To solo stake, you must run and maintain an internet-connected Ethereum node using your own hardware and software, in addition to depositing 32 ETH. Being a validator means having machinery and internet strong enough to keep a node online at all times, otherwise the validator’s ETH will be penalized.
While solo staking is a significant responsibility, successful solo stakers earn rewards directly from the protocol instead of through third parties. They also have full control over the keys used to collect funds from ETH deposits and staking rewards.
Staking as a Service
Staking as a service, or “SaaS” in the Ethereum community, describes third-party services that run and maintain validator nodes on users’ behalfs. Users will still have to deposit 32 ETH to activate a validator, but delegate node operations to SaaS providers, usually for a cut of reward earnings. Staking as a service is often best for those who want to stake Ethereum but don’t have the necessary hardware or knowledge to be a validator on their own.
Staking as a service requires users to share their validator keys with their SaaS provider, leaving only partial control over node operations and fund access. However, this also means having a fully-maintained validator client to earn staking rewards from.
Pooled Staking
Pooled staking, or staking pools, involves multiple users contributing ETH together to reach the required 32 ETH deposit and activate one set of validator keys. Similar to staking as a service, pooled staking delegates validator node operations to a third-party, but can be done so with a low amount of ETH. In many staking pools, users are given a liquidity token that acts as a receipt of staked amounts, which can be used as collateral on decentralized finance (DeFi) applications.
Pooled staking is the cheapest way to begin Ethereum staking, as many pools accept any amount of ETH to stake and reap rewards. Using a staking pool also doesn’t require users to generate validator keys. Due to having several participants involved under a single validator, though, rewards are split and are usually smaller in value than other staking methods.
How to Stake Ethereum
For solo staking or using staking as a service methods, the first step is holding a balance of 32 ETH. This ETH will be used for the deposit in the staking deposit contract to become a validator. Since 32 ETH is required for one validator, any more purchased will each need the same ETH amount.
For pooled staking, users must hold enough ETH to join a collective staking pool of their choice, where they’ll stake only a portion of ETH and receive rewards respective to their contribution.
Any of these deposits for the validator process go onto the Beacon Chain, a proof-of-stake chain part of the Ethereum mainnet.
“Any extra funds [beyond 32 Ether] will not give you any profit,” Zomchak said. “So it makes sense to leave them to form another validator.”
Depending on your way of staking, here’s how to jump into it from here:
For Solo Stakers
1. Begin Validator Process on Ethereum.org
Solo stakers begin the validator process at Ethereum’s Staking Launchpad page, which walks through the requirements to become a validator. This process starts solo stakers on the Goerli testnet, so they can test their node setup before placing it on Ethereum’s mainnet.
2. Prepare Ethereum Node
Running a node requires hardware devices that can operate 24/7 and have more than 900 terabytes in memory to spare. One of the simplest options for running a personal node is using preconfigured plug-and-play solutions like Dappnode or Avado.
Solo stakers must also download software on their devices that enables transaction validation, known as an execution layer (EL) client and consensus layer (CL) client. These clients work to verify data and secure the network, and are what help the node run. Client options are available to choose from on the Launchpad page.
3. Generate Validator Keys
Through the Launchpad page, users can choose how to generate their validator keys, whether that be building from a source or by downloading a key generator like Wagyu Key Gen. After creating and configuring the keys, deposit data attached in the keys’ files will be needed for upload on the Launchpad page to continue.
4. Connect Wallet and Deposit 32 ETH
On the final step of the Launchpad page, this is where users must connect a crypto wallet and send their deposit of 32 ETH to the designated staking deposit contract address. From here, users will have to wait for their deposit to be processed and validator to be activated on the Beacon Chain, which can be monitored by using their validator public key on sites like beaconcha.in or BeaconScan.
5. Maintain Node and Practice Being a Validator
After testing node setup and skills on the Goerli testnet, users who are comfortable enough can begin solo staking using the same steps on the Mainnet Launchpad page.
For Staking as a Service (SaaS)
1. Find and Download or Sign Up for a SaaS Provider
Staking as a service isn’t natively supported on the Ethereum network, so users will have to seek out a SaaS provider based on their preferences. As a starter, some staking as a service providers include Blox Staking and Abyss Finance.
2. Follow Instructions to Generate Validator Keys and Set Up a Validator
Many SaaS providers will have guided instructions and a built-in system to help stakers generate their validator keys and set up as a validator. Users going this route will not have to use an outside software to get their keys or configure a node, as the provider will already have these procedures arranged within their application.
3. Connect Wallet and Deposit 32 ETH
Similarly with solo staking, users will have to deposit 32 ETH to the attached staking deposit contract address in-app to secure their validator status.
For Pooled Staking
1. Find and Deposit Into a Staking Pool
Pooled staking also calls for third-party solutions in order to stake, but there are several to choose from based on how much ETH users have available. Many staking pools will take any amount of ETH for users to join, with a few only requiring deposits as little as 0.0001 ETH. Some popular crypto exchanges, such as Coinbase and Binance, even offer staking options through their platforms that use pooling.
2. Earn and Use Liquidity Tokens
After depositing, users tend to receive rewards from staked ETH in the form of liquidity tokens, as mentioned. These tokens can be converted back for ETH, traded on crypto exchanges or held in users’ wallets to gain interest.
Why to Stake Ethereum
Monetary Rewards
Those who stake Ethereum and become validators “are providing a public good for the network and getting paid for it,” said Habeeb Syed, a senior associate attorney at Vicente Sederberg LLP.
Staking Ether is also “a low-risk way to put your tokens to work,” Syed added. “If you don’t want to go through the trouble of setting up your own validator, you can always use a centralized exchange or other platform which offer easier alternatives.”
The reward for validating blocks is no longer fixed, as rewards once were under Ethereum’s prior proof-of-work consensus mechanism. A block’s value now depends on the number of active validators in a network and the total amount of staked funds paid into Ethereum’s protocol.
Decentralized application, or dApp, developers may “tip” validators as an incentive to speed up transaction processing and prioritize their operations in the queue by including them in the next available block. Another method, known as maximum extractable value, is a way validators gain additional revenue by reorganizing the order of transactions on standby from the common memory pool before they are included in a new block.
Exactly how much you can make from staking ethereum depends on multiple factors, including how much ETH is staked, the way a user stakes, the amount of validators on-network and the market value of ETH upon reward processing. Ethereum uses a specific formula to take these factors into account and delegate rewards. As of April 2023, users can expect around four percent annual percentage yield on their staked ETH, according to MilkRoad.
Sustainability and Accessibility
Sustainability and accessibility are reasons why users flock to Ethereum, according to Syed.
“Ultimately, proof of stake does allow more people to participate in a more meaningful way on the network, and it makes usage of Ethereum more palatable without the energy waste controversy,” Syed said. “But it does not in and of itself make Ethereum more accessible for users.”
The biggest barriers to accessibility that remain are gas fees and transaction speeds. A common misconception of Ethereum 2.0 is that the network would be faster and cheaper. Syed said that’s not the case.
“People purchasing Ether or transacting on the network for the first time may be confused by having to pay several dollars for a simple transaction,” Syed said, in a post-Merge market. While proof of stake significantly reduced Ethereum’s energy usage, gas fees have generally stayed the same. Though historic, the Merge upgrade has left room for improvement, potentially to be seen with additional upgrades down the line.
How Many Validators Are on the Ethereum Network?
Ethereum has over 606,000 validators on its network as of June 2023. To maintain network stability, Ethereum implements a queue of eight validator activations or exits per epoch, preventing any mass validator joins or leaves.
How Long Is Ethereum Staked For?
After staking, how long users have to wait to “unlock” or move out tokens depends on network conditions, varying from a few days to a few weeks. The standard bonding period of ETH stands at 14 days before it goes into the exit queue, according to Bitbuy.
“Once tokens are staked, they’re on hold for an extended period to provide liquidity [respective to the amount of] staked Ether,” said Trouw.
Risks of Staking Ethereum
Slashing and Validator Penalties
When a validator operates maliciously or makes an incorrect on-chain attestation, this will result in slashed, or lost, earnings. This ‘“slashing insurance” is there to keep validators accountable, and is utilized to punish validators for inactivity or malicious actions.
Some violations that cause slashing include proposing and signing two different blocks for the same slot or attesting to change the history of a block. If slashed, staked ETH will gradually be taken from the validator and they will be removed from the network.
Third-Party Vulnerabilities
If using a staking as a service provider or staking pool, staked ETH is held by a third party and not kept privately by the staker. This makes earnings more susceptible to system theft, hacking or government intervention if the third party violates the law.
Market Volatility
Staking any cryptocurrency comes with the possible change in token value as the market shifts. This can result in quick increases in reward earnings, but also quick decreases, so it’s best to consider budget and willingness for investment risk before staking.