Ethereum (ETH)staking guide

Staking has evolved into a massive industry with multiple services and opportunities for investors and builders to capture the value of utilizing staking. Since the release of the Bitcoin Whitepaper, our industry has worked tirelessly for replacing the need for trust through intermediaries with cryptography. Bitcoin enabled that and it has been our entire ethos ever since. In the industry, we have a saying “not your keys, not your coins”, and it emphasizes the importance of being in control of your funds i.e self-custody on a wallet where you own the private key. Now, the trade-off between self-custody and using an external custodian comes down to the convenience of using your asset. The less trust you have for external custodians, the less convenient it will be to use your crypto, however you will undeniably give up on the security aspect of your crypto. In this article, we will guide you through the differences and the trade-offs when it comes to staking on your own, decentralized, or through any centralized service. Whether you chose one above the other depends entirely on your individual situation. We are here to inform you about the advantages and disadvantages from each-other and how they differ.

For the sake of simplicity, let’s separate ETH staking into four categories, from most decentralized to least decentralized.

• Solo home staking
• Staking-as-a-service
• Pooled staking
• Centralized staking(Exchanges)

This graph tries to illustrate, where on the spectrum the different solutions lies when it comes to decentralization and network risk. As a general rule of thumb, no service or party should have to much share on the network to avoid centralization. Centralized services and pooled staking solutions are the two biggest risk to that category, but it should be noted, that also non-custodial staking-as-a-service solutions could pose a risk, if they get a big network share.

Solo home staking

Solo home staking is considered the gold standard for staking. It is the most direct relationship between an operator (you) and the Ethereum protocol. It provides full participation rewards, improves the decentralization of the network and never requires trust on anyone else with your funds. However, it is also the most technically complex way of staking and requires a good amount of experience running command lines and stabile hardware and software to run the staking operations.

Requirements:

• 32ETH per validator
• Stable internet to avoid downtime & slashing
• A computer/hardware with a 2TB hard drive and minimum 16 GB RAM
• Know how to set up a node and validator

Pros:

• Full participation rewards
• Most secure and decentralized

Cons:

• The most complex way of staking
• Maintaining nodes and validators

Staking as a service

If you do not feel comfortable running command lines and dealing with hardware, but still value the decentralized aspect of Ethereum, staking through a non-custodial staking provider is the way to go. It offers you the ability to participate with the required 32 ETH per validator, earning native block rewards while delegating the hard part to the service provider. The staking provider guides you through the process of creating a set of validator credentials, uploading your signing keys, and depositing your 32 ETH. This allows the service provider to validate on your behalf. This method of staking requires a small amount of trust in the provider, as the keys to withdrawal are kept in your possession, but trust in the service provider that they maintain full uptime to avoid slashing penalties.

Requirements:

• 32 ETH per validator
• Wallet to send ETH and receive rewards (Usually MetaMask or Ledger)
• Know-how in terms of sending an ETH transaction

Pros:

• Keep control of your funds
• Easy to use
• Run a native 32 ETH validator without the complexity involved

Cons:

• Small fees to service provider might apply
• Trust in service provider that they maintain uptime

Pooled Staking

As the price of running a full validator with 32 ETH has become relatively high (Approx. $60.000), several pooling solutions now exist to meet the demand of investors, who do not have 32 ETH to stake, but still looking to participate and earn rewards. Many of these options include what is known as “liquid staking”, which means you receive an ERC-20 token that represents your staked ETH. Liquid staking enables many benefits such as easy exiting of staking and you can deploy the liquid ERC-20 token on other DeFi services to earn additional yield. However, it is important to state that this is not native to the Ethereum network, meaning it requires a high amount of trust in third parties building these solutions. It comes with additional risk and it is important to DYOR before using a solution like this.

Requirements:

• Any amount of ETH
• Wallet to send ETH and receive liquid ERC-20 token(Usually MetaMask or Ledger)
• Know-how in terms of sending an ETH transaction

Pros:

• Participate with any amount of ETH
• Easy to use

Cons:

• Smart contract risk. If fx. Lido or Rocketpool has a bug, it could be exploited
• High level of trust on third parties

Custody staking

Staking operates within the same spectrum of trade-offs when it comes to custody solutions. If you stake through external custodians such as Coinbase, you will benefit from the convenience of having your crypto assets in custody and be able to stake directly through their service. You can think of it as a complete package solution. Buy, hold and stake. It seems perfect and is the absolute easiest way to stake. However, 2022 showed us why it’s not perfect to use centralized services for custody and staking. The problem is, if you opt for using a custodian for staking, you chose to rely on the centralized entity to control your assets (which they technically own because they hold the private key to the wallet). This means that not only do you not own your crypto, you have no saying in where your assets are being staked and you are giving the custodian more power over the blockchain you have invested in, further centralizing the blockchain. Finally, custodians tends to take a large share, up to 15% of your rewards, which is the price you pay for convenience.

Requirements:

• Any amount of ETH
• KYC on the chosen exchange/custody provider

Pros:

• Easiest way to stake
• Custody & staking at the same place

Cons:

• High level of trust on the custodian/exchange
• Not your keys, not your coins
• Centralization risk if they get to big

That’s it! Now you are familiar with the different solutions to Ethereum (ETH) staking and hopefully, you can use this to make your decision when staking your ETH in the future.