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What is Ethereum staking?
Ethereum staking allows ETH holders to earn a reward in return for helping to secure the Ethereum blockchain network.
Prior to a major network upgrade known as The Merge, Ethereum used a proof-of-work consensus mechanism similar to other popular blockchain networks such as Bitcoin, Litecoin and Monero. During The Merge, Ethereum migrated to a more energy-efficient proof-of-stake consensus mechanism. This new generation of Ethereum was previously known as Ethereum 2.0, but the Ethereum Foundation has recently moved away from this name.
Unlike the outright competition of proof-of-work, proof-of-stake uses a different series of incentives and penalties to ensure that network participants behave honestly.
Proof-of-stake (PoS) is essentially a lottery-based system, where network participants purchase and lock away a protocol's native tokens in exchange for rewards that come from validating blocks of transactions. Those who opt to lock away more native tokens have a higher likelihood of being selected by the protocol to become a validator.
This system works on the assumption that those who have made a larger investment in ETH have the largest incentive to ensure the protocol functions as expected.
However, to prevent large holders from dominating the validation process, a degree of randomness is baked into the protocol. This feature makes sure that even those with a comparatively small amount of staked tokens have a chance of being selected to validate a block of transactions.
Ethereum's staking mechanism serves multiple purposes that help the blockchain operate. First, staking helps to maintain the integrity of past information stored on the Ethereum blockchain. Staking also plays an important role in ensuring the accuracy of new information as it is added to the Ethereum blockchain. Finally, staking serves as a way to reward Ethereum blockchain users for their help in securing the Ethereum blockchain.
How Ethereum staking works
Ethereum staking uses a series of incentives and penalties to operate. These allow the protocol to ensure information is being recorded and stored accurately. They also allow the Ethereum network itself, rather than a centralized company or individual, to verify information is being recorded and stored in an accurate way.
The first step in the staking process is for individuals to "stake" their assets. Stakers have several options when choosing how they would like to stake their coins. While individuals are able to set a validator node up themselves, many find it is easier to stake their ETH with an already configured validator node set up by staking service providers or crypto exchanges like Kraken.
Regardless of the chosen method, staked funds act as a form of collateral. The staked crypto assets are kept in a smart contract and help to incentivize holders to behave honestly with minimal oversight. Staked funds can be taken away or "slashed" from dishonest stakers that are found to have committed malicious behavior by trying to tamper with the network or record false information.
Why stake ETH?
People choose to stake their Ethereum for a variety of different reasons. By staking ETH, users are able to directly take part in ensuring information is accurately recorded on the Ethereum blockchain. A larger number of people staking ETH ultimately makes the Ethereum blockchain more stable, resistant to attacks and secure for all users. This helps to ensure that Ethereum's ecosystem of decentralized applications and services continues to function.
Beyond the satisfaction people may receive from knowing they have a tangible impact on helping to secure the Ethereum blockchain, ETH stakers receive monetary rewards for their contributions.
In return for committing their ETH to the staking process and helping to run a validator node, ETH stakers are rewarded with newly created units of the ETH cryptocurrency. For ETH holders that believe in the long-term prospect for the Ethereum blockchain, they may choose to stake ETH in order to both support the network and earn rewards for their efforts.
What are ETH validator nodes?
Validator nodes are computers that help to ensure the accuracy of information being recorded on the blockchain. By processing transactions and verifying their accuracy as they are added to the chain, validator nodes collectively work together to ensure the blockchain operates reliably.
Validators must first run purpose built validator software on their machines in order to participate in the consensus process. This software can be downloaded for free from a variety of different providers. It also does not impose highly specialized hardware requirements such as those in proof-of-work.
After downloading the software on their machine, validator nodes are typically required to have some amount of cryptocurrency staked within them in order to start validating transactions on the network. This is to ensure the user has a "stake" in ensuring the blockchain operates reliably. While many people are capable of setting up their own validator nodes, many choose to stake their assets with an already established node. Validator nodes can be somewhat technical for some people to set up and run themselves. Additionally, if the validator node is offline for extended periods of time, and therefore not available to validate new transactions, the Ethereum protocol may punish the validator for not being online.
For these reasons, many choose to delegate the responsibilities of running a node to others and stake their assets with an established node.
What are Ethereum staking rewards?
Ethereum staking rewards are what Ethereum stakers receive in return for helping to validate transactions. Ethereum staking rewards are paid out in the ETH cryptocurrency.
The ETH staking APY (annual percentage yield) is determined by a variety of factors, including the total staked amount, the amount of activity on the network and more. The Ethereum protocol itself determines the staking reward rate and automatically adjusts ETH staking APY on a regular basis based on these different factors.
Can I trade my staked ETH?
It is not possible to actively trade ETH that is being staked. This is because staked ETH is fully dedicated to helping to secure the Ethereum network and therefore can not be used for other purposes.
However, there are other options that are available. For those staking their ETH on a cryptocurrency platform like Kraken, the platform may allow staked ETH to be unstaked at any time and become available for trading immediately. With no lock-up periods, users can unstake their ETH whenever they wish and start trading their ETH on Kraken.
Although there are no lock-up periods while staking on Kraken, some stakers may choose to use a liquid staking protocol instead. Liquid staking protocols provide stakers with a derivative token in return for staking their ETH. These derivative tokens can then be traded or used across a variety of decentralized finance services in a similar way to the original underlying ETH that is staked. For those interested in being able to trade and stake ETH at the same time, liquid staking may be a worthwhile option.
What is liquid staking?
Liquid staking protocols allow individuals to trade against the ETH they hold while also retaining their staking benefits. In return for staking their assets with a liquid staking protocol, traders receive a derivative known as a liquid staking token. While the underlying ETH is locked in the staking protocol, traders can use these derivative tokens for different trading purposes, including lending and borrowing across different yield farming protocols.
Liquid staking combines the ability to earn rewards for helping to secure the network with the flexibility of holding and using liquid assets. For those who want to earn staking rewards while also participating in decentralized finance (DeFi), taking advantage of arbitrage opportunities, or simply having the freedom to transact with their assets, liquid staking may be a viable option.
However, it's essential to consider that liquid staking solutions may introduce some counterparty risk, as specific service providers or smart contracts typically handle the issuance of staking derivatives and the custody of the original staked assets. Users should do thorough research before choosing a reputable liquid staking provider to mitigate these types of risks.
How can I stake ETH?
There are several different ways to stake Ethereum. Because each offers its own benefits and drawbacks, it is important to understand the nuances of each option as you determine which is the best option for staking your ETH.
Using a crypto platform like Kraken
For those looking for an easy way to stake Ethereum, using a centralized exchange such as Kraken may be the best option. After signing up for an account and funding your crypto wallet with ETH, centralized services like Kraken help to remove all the complexity of managing a staking node. With just a few clicks, you can start staking ETH on a platform like Kraken in minutes.
Joining an ETH staking pool
Staking pools allow multiple individuals to combine their staking power and share the rewards generated by the network. By aggregating funds across multiple participants, stakers increase their chances of being chosen to validate transactions and ultimately earn rewards. Before participating in a staking pool, you should research the pool's performance, fee structure, reputation and security measures, as well as any specific rules or requirements that may be needed before joining the pool.
Setting up your own ETH validator node
For those that have a deeper technical understanding of blockchain technology, setting up their own validator node may be an option. Although this method requires the most technical expertise and is subject to several potential risks, setting up your own validator node allows you to directly connect to the Ethereum blockchain. This means that no third parties are involved in the setup process and the validator can keep all of the rewards they generate.
Ethereum staking FAQ:
Can I convert ETH to USD?
What is proof of stake?
Can I stake ETH using my hardware wallet?
How do I run a Ethereum validator node?
What is the difference between on-chain and off-chain staking?
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