Ethereum staking, without the jargon

Staking is how Ethereum has secured itself since it moved to proof of stake in September 2022, an upgrade known as the Merge. Validators lock up ETH as collateral and run software that proposes and checks blocks. The protocol rewards them for doing this correctly and penalizes them for going offline or breaking the rules. A staking rate is payment for a job that carries specific risks. It is not interest on a bank deposit.

Key takeaways

• Validators stake ETH, propose and attest to blocks, and earn protocol rewards plus a share of transaction fees.
• Running your own validator requires 32 ETH and reliable hardware. Pools, services and exchanges lower the barrier but add dependencies.
• Staking rates change with network conditions. Fees, downtime, slashing, exit queues and contract risk all affect what you receive.
• A liquid staking token is a claim on staked ETH, not ETH itself, and it can trade below the value it represents.

What validators do

Time on Ethereum is divided into 12-second slots. In each slot one validator is chosen to propose a block, and committees of other validators attest that it is valid. When validators holding enough of the total stake agree, checkpoints become final, and reversing them would cost an attacker a large share of the stake. Validators earn rewards from newly issued ETH, and block proposers also collect priority fees and other payments for ordering transactions.

The stake is what keeps validators honest. A validator that goes offline loses small amounts over time. Provably malicious behavior, such as signing two conflicting blocks, leads to slashing: a larger penalty and a forced exit from the validator set.

Ways to participate

• Solo staking. You run your own validator with 32 ETH and hold the keys. You get full control and full responsibility for uptime and security.
• Staking as a service. You deposit 32 ETH and an operator runs the validator. The operator holds the signing key, while withdrawals can go to an address you set. Less work, but you rely on the operator’s performance.
• Pooled or liquid staking. You deposit any amount into a protocol and receive a token in return. A smart contract and the node operators it selects do the work. The minimum is low and the token is tradable, but you take on contract and governance risk.
• Exchange staking. You opt in from an exchange account and the exchange holds the keys. It is simple, but custodial, and subject to the exchange’s fees and terms.

Read the risks

• Variable rewards. The rate depends on how much ETH is staked across the network and on fee activity. A quoted figure describes the past; it does not promise the future.
• Provider fees. Pools, services and exchanges keep a share of the rewards.
• Penalties and slashing. An operator’s mistakes cost you money even if you never touched the validator.
• Exit queue. Leaving the validator set passes through a queue whose length depends on how many others are exiting at the same time.
• Smart-contract and governance risk. A pooled product depends on code, price oracles and the people who can upgrade it.
• Token discount. A liquid staking token can trade below the ETH it represents, especially when markets are under stress.

Compare like with like

When two products quote different rates, find out why. Is one an APR and the other an APY that assumes compounding? Is it before or after fees? Does it include rewards paid in a different token? Then ask who holds the keys, how and when you can withdraw, and what happens if the provider fails. A higher number does not answer any of those questions.

The tax and legal treatment of staking rewards varies by country. Check the rules where you live.