Guide to Ethereum Staking
This guide is intended on educated those with little to no background in crypto.
In a post-merge world, Ethereum is not only deflationary (yes, the supply is decreasing due to EIP-1559) but it also has the ability to be staked (due to the merge to PoS). The hottest denominator of exponential wealth just got a facelift, and its to the tune of ~6% per year on your money. How you may ask? Quite simply, it is through the passive accrual of transaction fees via staking your Ethereum.
What is staking?
Staking is a term used to describe burning your Ethereum at the stake. No, wait, I mean it is the act of putting your coins ‘at stake’ essentially to earn another token usually.
In the case of many defi protocols, you stake your tokens to accrue more of something else. In an ever expanding universe of ponzinomics, developers are creating more and more ways to squeeze the juice out of every penny by routing it through many defi protocols in the hopes of earning fees and interest.
Eth staking is a much simpler strategy than that however. By staking your Eth with a liquid staking provider such as Lido, they use your coins to help secure the network under the Proof of Stake model. The PoS model is designed to be environmentally friendly (energy usage has gone down 98%+ to run the Ethereum network) and increase the sustainability of the network security over time.
There are many concerns with the Proof of Work model, the network security design that Bitcoin and Dogecoin run on, as it consumes ever more electricity, and the miners play a very competitive game trying to capture an ever decreasing supply of tokens.
If the fees are constantly decreasing in PoW it does not incentivize new miners to get into the game as the barrier of entry gets higher with every hashrate increase and halving. With PoS however, it incentivizes long term holding of the token and improves how the network is run in many ways that are beyond the scope of this article.
If you would like to know more about the mechanics of Ethereum I will add some references (see inevitableeth.com) at the end of the article.
Why would anyone stake their Ethereum tokens?
There are many reasons that one would want to stake their Eth tokens. the main reasons being:
If you are a long term believer in the Ethereum network and want to help to keep it secure and decentralized.
You are a long term investor in Ethereum and want to maximize your returns.
You are a hobbyist and want to run your own node with services such as Rocketpool.
You want to use staked Eth in DeFi.
What kind of returns are we talking?
At the time of writing this the rates are as follows:
Lido stETH and Ankr aETHc
Frax frxETH
Rocketpool rETH liquid staking
Running a node on Rocketpool (16 ETH + 1.5 ETH worth of RPL minimum):
Stakewise.io sETH(2)(10% staking fee is charged on staking rewards from this validator)
Coinbase cbETH or ETH2
Where can I stake my Ethereum?
Different options:
Centralized Exchanges such as Coinbase
Lido
Rocketpool
Frax Finance
Ankr
Stakewise and other SaaS
Coinbase (cbETH):
Coinbase is one of the largest centralized exchanges in the world. They offer Eth staking through their platform with a centralized validator. Coinbase has been known to charge a lot in fees, but it does not say that there is a staking fee associated with staking ETH2 on their platform.
In a previous video on the channel, we talked about Coinbase and how to get signed up. Check that out here:
.
Pro: It is the easiest of all the options, it only takes a few taps on their app and you’re well on your way to earning 1–10% a year depending on the annual percentage rate. Current rate is on the high end at 6.85%
Con: It is a centralized exchange, and there have been a lot of central exchanges in the past that have gone bankrupt or insolvent. If that is the case then your funds will be at risk. Not your keys, not your crypto.
By definition, the central exchange also uses a centralized validator as well, making the network less secure than a decentralized option.
To learn more check out:
https://www.coinbase.com
Frax (frxETH):
Frax Finance, a popular DeFi protocol, just recently launched their liquid wrapper to staked Eth called frxETH. The benefits of frxETH are that it is fully dedentralized and it trades at parity to ETH 1:1. Currently the yield is slightly higher than other options. The main downside to Frax is it is harder to stake your coins with a DeFi protocol than it is with a CEX. Staking with Frax and Lido are about the same amount of steps however.
You need to mint frxETH with your ETH coins and once the minting is approved and the swap takes place, you must stake your tokens. When the tokens are staked, you will receive sfrxETH, and that means you will be generating ETH yield.
Pro: Stakers get the benefit of earning the ETH yield from LPs on Curve/Convex, as these LPs will receive not ETH but CRV or CVX for their pooled token fees.
At this time, the frxETH staking pool is only about ~40% of the current supply of frxETH, which means that if you are staking you are earning 2.5x the ETH yield than you would if the pool was full.
As more LPs join the Curve pool (frxETH-ETH) the yield is expected to increase. This is due to the fact that the staking pool will continue to shrink, and stakers will effectively take yields from those who are not staked within the pool.
Reminder that frxETH trades at parity with ETH and the minting mechanism is based on that of the FRAX and FPI stablecoins. This makes it useful in defi and liquidity pairs because it can essentially replace WETH within a liquidity pair.
Cons: There is a low amount of liquidity compared to other options, but swapping should not be much of an issue due to the mint and redeem functionality.
FrxETH is new and not battle tested. Only time will tell if it is truly going to live up to the hype and be an industry leader in staking services.
To learn more check out: https://www.frax.finance
Rocketpool (rETH)
Pro: Rocketpool is the most pro-decentralization staking platform out there, and this is due to their unique validator program. Rocketpool has created their own client that helps you run your own node at home. By following the guides on their website, you are able to get the hardware you need to build a node, and then follow the instructions to fund and run the node using the client software.
Rocketpool also incentivizes the program of running your own node by lowering the barrier of entry to 16 ETH instead of 32 ETH to run your own node. They do this by pooling the liquid staked ETH in with your 16, which promotes decentralization on the network.
There are also some benefits to pooling rETH and LPing on platforms such as Balancer, as there is good yield there with a low risk of impermanent loss (IL). We will learn more about IL in the article about providing liquidity, but just note that IL is the difference between your LP token value, and the value of the coins you started with + or — the percentage they changed. IL is calculated differently on every exchange.
Con: The staking apr is the lowest at this time at only 3.3%.
The other main downside is that rETH does not trade at parity with ETH. It is not pegged by anything except for liquidity, and the price is trading at 1.07 of Ethereum’s price point.
To learn more check out:
https://www.rocketpool.net
Lido (stETH)
Lido DAO is a liquid staking as a service protocol that not only has the highest TVL for ETH, but also has staking services for Polygon (MATIC), Polkadot (DOT), and Solana (SOL) to name a few.
The Pros: Large amount of liquidity (5 billion in TVL.)
Ability to stake other coins such as MATIC.
Highly profitable business with a high $ amount of fees and revenue accrued.
The Cons: Does not promote full decentralization ethos as the protocol only allows liquid staking but does not allow users to run their own nodes and help the network stay decentralized.
The other main downside is the stETH does not trade at parity with ETH. It is not pegged by anything except for liquidity, and the price has dropped as low as .9 or less on highly liquid exchanges such as Uniswap. This is known to happen to coins during times of liquidity crisis such as the Luna collapse in May of 2022, but it is something to be cognizant of.
To learn more check out:
https://www.lido.fi
Ankr
Ankr is a liquid staking as a service protocol similar to Lido, that offers staking services for Polygon (MATIC), Polkadot (DOT), Avalanche (AVAX), and BNB to name a few.
The Pros: Large amount of liquidity
Ability to stake other coins such as MATIC.
Does offer RPC services for developers as an added plus for decentralization.
The Cons: Does not promote full decentralization ethos as the protocol only allows liquid staking.
The other main downside is the AETHC is it does not trade at parity with ETH.
To learn more check out:
https://www.ankr.com
Stakewise and other staking-as-a-service
Stakewise is a liquid staking as a service protocol similar to Lido and Ankr, that offers staking services for Ethereum as sETH.
The Pros: Good amount of liquidity and sETH is battle tested.
The Cons: Does not promote full decentralization ethos as the protocol only allows liquid staking.
10% staking fee is no bueno.
The other main downside is the sETH is it does not trade at parity with ETH. Although it is trading very close to parity.
To learn more check out:
https://www.stakewise.io
Best yield:
Currently the best yield for staked Ethereum is found on Frax and Coinbase. Coming in a close third is running your own node with Rocketpool
[References]: Haym Solomon’s “Inevitable Eth” a deep dive into the inner workings of Ethereum:
https://inevitableeth.com/
https://www.rocketpool.net
https://www.frax.finance
https://www.convexfinance.com
https://www.geckoterminal.com
https://www.balancer.fi
https://www.defillama.com
https://www.ankr.com
https://www.stakewise.io
https://www.lido.fi
Tweets regarding Proof of Stake:
Tweet regarding frxETH:
(much of the information can be verified in the docs on frax.finance)