Staking Ethereum
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Staking Ethereum
Last week we explored the concept of staking. Staking is what validators in a Proof of Stake system are required to do in order to secure their respective blockchain. All blockchains have their own unique ways to stake, all with different hardware and software requirements. This week we are going to investigate the different ways you can stake Ethereum. To better understand why people are required to put up a financial stake in a Proof of Stake system and how it differs from Proof of Work, we suggest you give last week's article a read before jumping into this one.
Ways to Stake ETH
The Ethereum Beacon Chain went live on the 1st of December 2020. The Beacon Chain introduced Proof of Stake to Ethereum. It is a chain that is currently running parallel to Ethereum's Proof of Work mainchain; however, they will merge in the future when the complete transition to ETH 2.0 happens. It hasn't changed anything fundamentally about the Ethereum we use today, but people can put their idle ETH to work and earn a yield for the first time. The yield that one can expect varies as the number of people staking on the network changes.
Currently, around 250 000 validators are staking almost 8.3 million ETH on the beacon chain, for an expected yield of 5.4%. There are several different ways to stake ETH that vary in complexity. We will explore the three primary ways you can stake your ETH: running an Ethereum Node, Staking as a Service and exchanges.
Run an Ethereum Node
Running your Ethereum node should be everyone's first option. It minimises the trust placed in third parties, increases the network's decentralisation, and allows the individual to absorb 100% of the financial value earned through staking. However, this is by far the most technically complex way to stake your ETH. It also requires you to stake an initial minimum of 32 ETH, which currently costs around $132 800, prohibitively expensive for most.
The Ethereum community comprehensively explains the process of setting up a node on the Eth2 launchpad. They have created an in-depth walkthrough so people understand what they are in for when running an Ethereum node, from responsibilities and requirements to penalties one could expect.
Becoming a validator starts with acquiring 32 ETH. Once you have 32 ETH, you will need to ensure you have the minimum required hardware to run a node. Running the ETH 2.0 node itself doesn't currently have very high hardware requirements; however, to be an ETH 2.0 validator, you are also required to run the ETH 1.0 node, which significantly increases the hardware requirements. Currently, to be an ETH 2.0 validator, you will need the following hardware at a minimum:
Processor: Intel Core i7–4770 or AMD FX-8310 or better
Memory: 16GB RAM
Storage: 1TB available space SSD
You should also ensure that you have sufficient bandwidth (both download and upload) that isn't throttled or capped. It is also best practice to have a dedicated computer running the node, ensuring maximum security and efficiency.
Bear in mind that these hardware requirements will change over time and potentially by orders of magnitude after the chains merge and shard chains are introduced.
For the purpose of this article, we won't take you through the rest of the setup as it now becomes technically complicated. If you want to learn how to finish the setup, we suggest you visit the Eth2 launchpad we linked to above. It will also help one understand the risk involved when staking and explain the potential situations in which your stake could get taken away or "slashed", such as acting dishonestly or not running the node 24/7.
The one caveat that comes with ETH 2.0 staking is that once you have moved your ETH from the Proof of Work mainchain to the Proof of Stake chain, you cannot send it back. You are betting on the successful implementation of ETH 2.0 and only being able to use your ETH once it transitions fully to Proof of Stake.
Staking as a Service
Unsurprisingly, due to the complexity involved with staking, not only with Ethereum, we have seen the rise of companies and more decentralised alternatives which offer Staking as a Service.
As the number of projects using the Proof of Stake consensus mechanism increases, so do the number of companies that help abstract the process and make staking easier—traditional companies like Staked, Stake Capital, Stake.Fish and Stakinglab offer end-users the ability to either delegate or transfer their tokens to these companies, and they take care of the rest of the process for a fee, usually around 10% of the staking reward you would expect from the network.
These companies promise to ensure that they will act honestly as a validator and guarantee constant uptime for the node, thereby reducing the chances of having your stake slashed. They also reduce some of the financial barriers to entry, such as you no longer need to put up 32 ETH and can enter with a much lower minimum. These services, however, like all that will follow, increase the centralisation of a blockchain network. This is due to there being fewer independent nodes voting or deciding on which blocks are legitimate.
We also have witnessed the rise of more decentralised Staking as a Service alternatives like Rocket Pool or Lido. When we say more decentralised, we mean within the number of different validator groups or companies that sit under the service. They almost act as Staking as a Service aggregators. They also have often implemented their own governance token that can be used to make decisions on matters such as which validator companies to use.
Rocket Pool has a specific focus on staking ETH, and Lido is more generalised to include other Proof of Stake assets such as Terra and Solana. These networks also take it one step further than some of the traditional staking companies; as explained previously, once you have staked your ETH on the new chain, they are now held there and cannot be used for any other purposes. These networks allow you to take a derivative of that staked ETH and actually use it on the existing Ethereum Proof of Work mainchain. These tokens are pegged 1:1 to your initial stake and can be used within DeFi networks as collateral, lending or put to work yield farming to compound your yield.
There is a large number of companies and projects that have started to provide staking services. You can visit the following site for a full list and get an idea of the fees they charge.
Exchanges
Exchanges have naturally gravitated to offering Staking as a Service. As you could imagine, these companies sit on massive reserves of crypto, often with the majority of it in cold storage. Therefore, they have gone the route of putting that crypto to work.
We have seen exchanges like Binance offering their customers the chance to stake their ETH for BETH, with the option to stake as little as 0.1 ETH, a significant decrease from the normal 32 ETH requirement. On Binance, once you have staked your ETH, you are issued BETH at a 1:1 ratio. Every day you are issued BETH rewards (your proportional staking reward) based on these holdings, so over time, your BETH balance should increase; when the Proof of Stake chain goes live, you will be able to redeem these BETH tokens on Binance for ETH also at a 1:1 ratio.
Exchanges have probably abstracted the staking process the most and made it the easiest to be involved. However, they also often hold massive reserves of these assets and therefore can start using that power over these networks how they see fit, especially if they don't have an explicit staking policy detailing how they will vote on your behalf.
Conclusion
The ability to put idle assets to work and increase the security of your chosen blockchain is something the world has never witnessed before. Staking ETH most certainly varies in complexity and the risk you expose yourself to. There is no right way to go about it; it all depends on your personal preferences. However, in an ideal world over time, what we would like to see from blockchain projects is the ability to run a node from the comfort of your own home with low technical and hardware complexity. This ability will allow for further decentralisation of these networks and give people the option to choose how their assets are put to work.
Staking yourself or choosing a staking provider can carry risk; we suggest that you understand all of them before putting your money to work. If you have any questions or need help with staking your tokens, please feel free to reach out, and we would be happy to help.
Notable Articles and News Stories This Week:
ProShares' Bitcoin Futures-based ETF Began Trading Tuesday
The first-ever bitcoin futures exchange-traded fund in America, the ProShares Bitcoin Strategy Fund (BITO) has become the second-highest ETF ever in opening day volume.
BITO, which debuted on the New York Stock Exchange Tuesday, closed the session Tuesday with 23.103 million shares traded, or about $950 million, according to data from TradingView. Blackrock's US Carbon Transition Readiness ETF, launched in April 2021, holds the record for opening day volume with $1.1 billion.
"I'm not surprised in the least by today's volume," said Nate Geraci, president of the ETF Store. "BITO's strong debut is reflective of the pent-up demand among individual investors and advisors to access bitcoin price exposure via traditional brokerage and retirement accounts."
Read more about the ETF here
Walmart Has Quietly Begun Hosting Bitcoin ATMs
Walmart, the world's largest company by revenue, is letting customers buy bitcoin at dozens of its US stores.
Shoppers can purchase the cryptocurrency at Coinstar machines inside the retailer's cavernous big box stores. A CoinDesk editor verified that the service works, buying a small amount of BTC at a Pennsylvania Walmart on the 12th of October.
"Coinstar, in partnership with Coinme, has launched a pilot that allows its customers to use cash to purchase bitcoin," Walmart communications director Molly Blakeman told CoinDesk via email. "There are 200 Coinstar kiosks located inside Walmart stores across the United States that are part of this pilot."
Read more about the story here
Fed Bans Policymakers From Holding Individual Stocks Following Controversy
Less than a month after the early departures of Federal Reserve governors Robert Kaplan and Eric Rosengren over controversial personal trading patterns, the Fed has issued stricter rules.
Fed policymakers and senior staff on both the Reserve Bank and the Board may no longer purchase individual securities, and active trading will be restricted, the central bank announced Thursday. Fed officials may also no longer enter into derivatives or invest directly or indirectly in agency securities.
"These tough new rules raise the bar high in order to assure the public we serve that all of our senior officials maintain a single-minded focus on the public mission of the Federal Reserve," said Fed Chair Jerome H. Powell in a statement.
Officials are still allowed to purchase some securities, but they must provide a 45-day advance notice of any buying or selling. Additionally, all securities must be held for a minimum of one year and no trading will be permitted during "heightened financial market stress," the release said.
Read more about the announcement here
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