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The Pros and Cons of Staking Ethereum

Jon Ganor
Jon Ganor
The Pros and Cons of Staking Ethereum
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  •  Staking is a popular way of earning passive income in the cryptocurrency world.

  • Securing the Ethereum network involves using a consensus mechanism called proof-of-stake (PoS), where validators play a crucial role in verifying transactions and monitoring for malicious activity.

  • The security of the network is directly proportional to the amount of ETH that is staked.

  • Withdrawing staked ETH is possible with relative ease, but there are waiting periods and fees to keep in mind.

  • The future of staking ETH looks bright, and we can expect to see continued growth and innovation in this space as the Ethereum network evolves.

Intro to ETH Staking

Staking has become an increasingly popular method of earning passive income in the cryptocurrency world. By holding 32 ETH in a staking node, validators can earn rewards while also contributing to the security and stability of the Ethereum network. During periods of low volatility, staking on Ethereum can be especially attractive due to the high APRs and low risk compared to other methods of cryptocurrency investment.

As the bear market continues, staking on Ethereum will likely become even more popular. This is because investors are looking for ways to earn rewards without exposing themselves to unnecessary risks. Staking provides a way to do just that, as validators are rewarded for their contributions to the network without having to take on the same level of risk as other forms of cryptocurrency investment.

In this article, we will discuss the benefits and disadvantages of staking Ethereum.

The Benefits of Staking

Staking Rewards & Passive Income

Staking your Ethereum can be a great way to earn passive income. You can earn ETH tokens as rewards by helping to secure the Ethereum network and validate transactions. 

One of the main benefits of passive income is that it can provide you with a steady income stream without having to work for it actively. This can be a great way to supplement your income or save for future goals. With Ethereum staking rewards, you can earn a passive income while also contributing to the security of the Ethereum network.

Securing the Ethereum Network

Securing the Ethereum network is a crucial task that involves using a consensus mechanism called proof-of-stake or PoS. This mechanism employs validators who are responsible for validating new blocks and adding them to the blockchain.

Validators play a crucial role in the network's security by verifying transactions and monitoring for malicious activity. They are incentivized to behave honestly and report any malicious activity they encounter by staking 32 ETH. Validators may be penalized by having some or all of their staked ETH slashed if they propose an invalid block or try to defraud the network in any way.

The network's security is directly proportional to the amount of staked ETH. A higher amount of staked ETH makes it more expensive for an attacker to try and gain control of the network. This is because an attacker would need to control most of the staked ETH.

By staking, you are actively supporting Ethereum and making it more resilient.

Withdrawals & Increased Liquidity

Withdrawals were added to Ethereum as part of the Shanghai hard fork. Now stakers can choose to withdraw their ETH from the network with relative ease.

When withdrawing staked ETH, it's important to keep a few things in mind. Firstly, be aware of the waiting period that applies once you stake your ETH. This waiting period can vary depending on the validator node that you use. 

Some staking pools and validator nodes may charge a fee to unstake your ETH. This fee is typically a percentage of your staked ETH. So be sure to check the terms and conditions before staking your ETH.

If the Ethereum network is congested, it may take longer to withdraw your staked ETH. This is something to keep in mind if you need to access your funds quickly.

If you do need to withdraw your staked ETH, you will need to follow the instructions of your staking pool or validator node. If you use a staking pool, you must typically submit a withdrawal request. The staking pool will then process your request and send your ETH back to your wallet.

The Disadvantages of ETH Staking

Staking ETH comes with some drawbacks that can complicate things. 

Lack of Liquidity

One of the biggest drawbacks is the lack of liquidity. When you stake your ETH, your funds become locked up in the staking contract or node, making them inaccessible until the staking period ends or you stop staking. This means you won't be able to use your funds for anything else until you withdraw, which can be frustrating. 

High Volatility

Another major drawback of ETH staking is the high volatility of ETH in fiat currencies such as the US Dollar. The value of ETH can change dramatically in a short period, which can result in significant gains or losses, depending on the market conditions. This volatility can be unpredictable, and there is always a risk that your staked ETH may lose value during the staking period.

Slashing Risks 

Validators can also be penalized for malicious or incorrect behavior, which can result in a loss of staked ETH. This is known as slashing, and it is a risk associated with staking. Understanding the rules and regulations of staking is crucial to avoid penalties. 

Technical Expertise Required

Becoming a validator requires technical expertise and knowledge of the Ethereum ecosystem. You need to set up and maintain a validator node, which can be challenging for those who lack technical knowledge. Understanding the technical aspects of staking is essential before making any investment decisions.

Overcoming Stakings Disadvantages via LSD protocols

There is a solution that can help mitigate some of those concerns. Liquid staking derivative pools, or LSDs, allow stakers to receive a liquid token that mirrors their stake, which can help alleviate the lack of liquidity that comes with staking directly. Additionally, the staking pool manages the technical aspects of staking, which can be a relief for those without the technical expertise required to set up and maintain a validator node. 

By staking ETH with Hord, you can experience the benefits of staking without many of the drawbacks. Hord is an LSD protocol ensuring that your funds are safe and secure. With Hord, you can earn rewards while your funds remain accessible, which can be a significant advantage for those who want to continue using their ETH for other purposes. 

We will discuss LSD protocols in depth in the following educational episodes.