Ethereum Liquid Staking Options

Since its launch in 2015, Ethereum has maintained its place as the second most valuable cryptocurrency by market cap after Bitcoin. Vitalik's brainchild has evolved from being just a cryptocurrency to becoming the backbone of some of the most promising projects in the crypto market. 

The long-awaited update of the Ethereum network, the Ethereum Merge, occurred on September 14–15, 2022. This merge was aimed at improving security, energy efficiency, and scalability by making significant infrastructure modifications. With the upgrade, Ethereum switched from a proof-of-work (PoW) model to a Proof-of-Stake (PoS) consensus mechanism.  

Under PoW, the Ethereum blockchain could process 15 transactions per second (TPS), which is a low number when compared to MasterCard, which processes 5,000 TPS, and Visa, which processes around 1,736 TPS.

PoS is anticipated to provide 100,000 TPS of processing, significantly exceeding traditional financial payment systems and greatly extending the range of projects and applications that may be developed on the Ethereum blockchain.

In terms of energy efficiency, the Ethereum Foundation blog mentions that the blockchain now uses about 99.9% less energy under PoS. This is a tremendous advancement that must not be dismissed. Additionally, there is a push to use more renewable energy sources for mining (PoW) and staking, such as solar or wind (PoS).

The transition to PoS opens the door for validators (not miners) to verify transactions happening on the blockchain and earn rewards. But because there's a high barrier of entry—investors would need to deposit 32 ETH collateral (about $42,400) to become a validator—staking pools have become more popular. 

But first, what's staking? 

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Staking: To Hold Or To Lend? 

In crypto staking, you buy the network's tokens you're interested in and either lend your tokens to validators or support the network directly by becoming a validator yourself. Ultimately, you receive rewards either way, and the earnings can either be withdrawn or reinvested to increase potential future gains.

Staking as part of the Proof-of-Stake consensus mechanism is the process of actively participating as a validator on the blockchain. While PoW requires miners to compete for rewards based on the computational power they acquire, the proof-of-stake consensus randomly selects validators based on how long and how much they have staked. 

In contrast to PoW, PoS validators are not required to mine blocks in order to keep the network running. Instead, they create new blocks when they are selected and validate existing ones when they are not. Other validators can vouch for the validity of the most recent block of transactions when one participant has done so. The network adds a new block once there are sufficient authentications.

The network then distributes rewards in accordance with each validator's stake in ethereum.

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What To Consider Before Staking

If you choose to stake on the Ethereum network, here are some points to consider. 

• First, Ethereum staking is a form of passive investment. After using staked tokens to help validate the blockchain, you do not need to do anything extra. With an APR averaging around 5%, you can earn about 1.3 ETH annually.

• Second, Ethereum offers a comparatively low risk versus other altcoins. Its popularity, global use cases, DeFi ecosystem, and security make it an incredibly  valuable network in the crypto space. 

• Third, Ethereum may penalize validators for not being online or validating incorrect transactions. Though this is rare, investment returns may be affected. 

Another con to consider is that staked tokens do not offer the option to withdraw your investment. If you need the flexibility to withdraw your investment, staking Ethereum isn't a suitable option, though liquid staking options may be. More on that later.

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How To Stake Ethereum

There are different ways an investor can stake their Ethereum. They differ in risk and the level of difficulty required to maintain them.  

1. Exchanges: Many crypto exchanges now allow investors to stake ETH at their convenience. There is a low barrier of entry for this kind of staking because there are no minimum staking requirements. The downside to this option is that exchanges take huge commissions on staking rewards (Coinbase, for example, charges up to 25%) and the security of stakes is at risk. These exchanges may be vulnerable to government intervention, counterparty failure, and hacking.

2. Individual validator node: Investors can run a validator if they have 32 ETH to get started. Then they have to get hardware that can handle the computational power required for Proof of Stake, alongside a strong internet connection. Given the high cost of staking 32+ ETH, the requirements to run a validator node tend to far outweigh the benefits for many.

3. Pool: Running a validator pool allows investors to pool their resources together to run a validator. This option allows you to enjoy the benefits of staking without making a large personal financial commitment. 

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Staking pools have become popular with a sector of the industry focusing on them as a service. There are two types: 

• Non-liquid staking pools: This type of staking pool allows investors to pool their tokens and share staking rewards in a traditional manner. They do not issue a derivative liquid token. 

• Liquid staking pools: A liquid staking pool issues a derivative token that can be actively traded and used. Stakers earn staking rewards while not losing the ability to go liquid. 

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Typically, liquid staking services exchange your ETH for a receipt token that you can hold as a record of ownership and trade while the original token keeps accruing rewards.

Additionally, liquid staking does not call for any extra actions to stake your ETH; instead, you receive a staked-ETH token in exchange for your investment, which you may use to swap or exchange for other cryptocurrencies.

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Liquid Staking Options 

Here are some Ethereum liquid staking pools that you might consider: 

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1. Lido Finance (stETH): 

Lido Finance has by far been the most well-liked staking pool with its Staked ETH (stETH). The liquid staking token was introduced by Lido in late 2020, just before the Beacon Chain was launched. The chain was deployed prior to implementing proof-of-stake on the Ethereum Mainnet and was designed to make sure the consensus mechanism was solid and sustainable. It therefore coexisted with the original Ethereum proof of work.  Because of the token's liquidity, ETH depositors obtain stETH, which they may then sell, trade, or lend out while their ETH is kept locked up with Lido.

According to Etherscan, the staked token currently has 115,230 holders with a fully diluted market cap of $5.8 billion. 

Recent estimates show that Lido owns more than 80% of the Ethereum liquid staking market. In 2021, Lido's growth reached 15,000%. It's a positive indication that people are willing to stake Ethereum.

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2. Coinbase (cbETH): 

Since April 2021, Coinbase has made Ethereum staking available. In August 2022, the exchange unveiled Coinbase Wrapped Staked ETH (cbETH), which exhibits behavior akin to that of stETH and can be pledged as a security in decentralized finance lending protocols. According to Etherscan, cbETH is held in 2,781 different wallets.

Users can make up to 3.65% on staked Ethereum on Coinbase, with no minimal ETH stake requirement, though Coinbase charges 25% commissions on staked token rewards. 

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3. Rocket Pool (rETH): 

Rocket Pool is one of the first decentralized Ethereum staking platforms. Using audited smart contracts that are open-sourced and audited keeps funds secure for node operators.

Users only need to deposit 0.01 ETH in order to start earning rewards with Rocketpool. Users earn rETH after exchanging ETH. Depending on how well decentralized node operators perform, this token delivers rewards over time. The token may be exchanged, lent out, or used as security.

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4. Kraken:

Since its founding in July 2011, the cryptocurrency exchange Kraken has maintained its top-rated status. Users of the platform can purchase and sell a range of cryptocurrencies. Additionally, it aids Ethereum stakers.

On Kraken, annual payouts for Ethereum stakes range from 4% to 7%, according to the company's website. Kraken, however, levies a 15% administration fee.

Users cannot trade staked ETH tokens at this time on Kraken. The platform intends to provide a market where staked Ether may be exchanged for unstaked Ether.

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5. Binance(bETH): 

Beginning in late 2021, Binance began issuing its Binance Beacon ETH (bETH) to Ethereum depositors who had joined its staking pool. Since the bETH tokens support liquid staking, users can use them on the Binance Smart Chain, an Ethereum sidechain, exactly like they would with regular Ethereum. BscScan reports that 9,267 different wallets presently hold it.

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Is staking ETH a Good Idea? 

Depending on amount invested, staking Ethereum is an easy way to earn rewards by becoming a network validator. If you are not a crypto tourist, it may return worthwhile yields in the longterm. 

Ethereum remains one of the most valuable crypto ecosystems and will continue to be an important blockchain in the crypto market. Hence, its upgrade to the PoS consensus model should improve the ecosystem around it. Stakers can be assured of the safety of their investments. 

However, if you're a crypto trader with greater interest in day trading, staking might not be for you. What is important is that you research your options and stake diligently.