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What is Ethereum Staking?

Jon Ganor
Jon Ganor
What is Ethereum Staking?
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After years of anticipation, the cryptocurrency Ethereum recently transitioned to a Proof-of-Stake (PoS) consensus algorithm. The transition allows anyone with 32 ETH to “stake” their coins, become a validator, and start confirming transactions via smart contracts to earn network fees. The transition allows large ETH holders to earn more ETH by validating transactions. Prior to the change, Ethereum depended on a Proof-of-Work (PoW) consensus model that required computers to solve mathematical puzzles to generate blocks on the blockchain.  

This blog post will discuss Ethereum, staking, and everything in between.

What is ETH 2.0 

ETH 2.0 was one of the first transitions to a PoS consensus model that took place in multiple phases. The first phase was the launch of the Beacon Chain in December 2020. The beacon chain was a parallel PoS blockchain that operated independently from the main chain.

The beacon chain and Ethereum’s main chain were combined after years of developments and upgrades. The combination of different Ethereum chains was an event dubbed “The Merge,” which occurred on September 15th, 2022. The Merge signified the complete transition of Ethereum to a PoS blockchain.

ETH vs. ETH 2.0 What’s the Difference? 

Before the Merge, the beacon chain and the Ethereum main chain operated independently. The beacon chain is a separate blockchain introduced as part of Ethereum 2.0 and is responsible for managing the proof-of-stake consensus mechanism. At the same time, the main chain (also known as the “eth1” chain) continued to use the proof-of-work consensus mechanism.

The beacon chain and the main chain were designed to work together in the future, with the ultimate goal of fully transitioning the Ethereum network to proof-of-stake and retiring the proof-of-work mechanism. As previously mentioned, this transition was known as “The Merge” or “Eth1-Eth2 merge.”

To prepare for the Merge, the beacon chain, and the main chain were designed to be compatible with each other. This compatibility is achieved by introducing a new type of validator known as a “validator client.” Validator clients allow validators to participate in both the beacon chain and the main chain to continue to secure the network and earn rewards.

Following The Merge, ETH1 or the previous main chain was retired. The transition to PoS results in a secure and scalable Ethereum network while also reducing the energy consumption associated with proof-of-work.

What is Staking?

Staking refers to the process of “locking up” cryptocurrency in a smart contract to help maintain the security and integrity of a blockchain network. In return, stakers earn rewards.

In many blockchain networks, such as Ethereum, staking is crucial to the consensus mechanism. Staking involves validators who verify transactions and add new blocks to the blockchain. Stakers put up a certain amount of cryptocurrency (such as ETH) as collateral to qualify for the validator role. This collateral, also known as a “stake,” helps ensure that validators have a financial incentive to act in the network’s best interest. If not, they stand to lose their stake if they act maliciously or inaccurately.

Validators are chosen randomly to propose and validate blocks based on their stake in the network. When validators successfully add new blocks to the blockchain, they earn rewards in the form of transaction fees.

Staking allows participants to contribute to the security and growth of a blockchain network while also earning rewards. It is often considered a more energy-efficient and eco-friendly alternative to the proof-of-work consensus mechanism. The PoW consensus model requires massive amounts of computing power and electricity to mine new blocks.

What is a Staking Validator?

A staking validator is a participant in a proof-of-stake blockchain network who is responsible for validating transactions and adding new blocks to the blockchain. Validators are similar to miners in a proof-of-work network. Instead of using computational power to solve complex mathematical problems to validate transactions, they use their cryptocurrency holdings to secure the network.

In a proof-of-stake network, validators are selected to propose and validate new blocks based on their staked cryptocurrency. The stake serves as collateral to ensure their honest participation in the network. Validators on Ethereum are required to hold a minimum amount of 32 ETH to participate in staking. Their stake is at risk of being slashed or reduced by 50% if they act maliciously or inaccurately.

To become a staking validator, you must set up a validator node and connect it to the blockchain network. This involves setting up a server or computer with a stable internet connection and installing the client software provided by the blockchain network. Once your validator node is connected to the network, and you have deposited the minimum 32 ETH required, you can start staking.

Validators earn rewards through transaction fees for their contributions to the network. The more Ethereum they stake, the greater their chances of being selected as a validator and earning rewards. Validators also help maintain the security and integrity of the network by validating transactions and adding new blocks to the blockchain.

What are Ethereum Staking Pools?

Ethereum staking pools allow ETH holders that do not meet ETH’s strict requirements to open a validator to stake Ethereum and start earning rewards. Staking pools lower the participation barrier, reduce risk, improve rewards at times, are easy to use, and offer greater flexibility.

The 32 ETH minimum required to participate in Ethereum staking can be a significant barrier to entry for many individual stakers. By joining a staking pool, stakers can pool their ETH with other participants and collectively meet the minimum threshold required to participate in staking.

Staking pools can help mitigate the risks of running a validator node, such as downtime, software bugs, or poor connectivity. By pooling their resources, stakers can reduce the risk of having their validator node offline for extended periods, resulting in penalties and decreasing rewards. 

By pooling their resources, stakers can also improve their chances of being selected as validators and earning rewards. With more combined staked ETH, the staking pool has a greater chance of being chosen to propose and validate blocks, resulting in more rewards for all participants.

Joining a staking pool is often more straightforward and user-friendly than setting up a validator node. Staking pools typically handle the technical aspects of staking, such as setting up and maintaining a validator node and provide a user-friendly interface for stakers to track their rewards and manage their staked ETH.

What is Liquid Ethereum Staking?

Liquid Ethereum staking is a product offered by many different Ethereum staking pools. These particular pools provide stakers a “liquid” token upon staking ETH. The liquid token usually represents the stakers original stake, rewards, or stake combined with rewards.

The liquid token can be traded on exchanges and used in DeFi ecosystems. Many, if not most Ethereum staking pools grant liquid tokens to stakers.

How to Become a Validator Ethereum?

Becoming a validator on the Ethereum network can be done in two ways. A staker can either create a validator at most staking pools or become a “solo staker” and operate a node on their own.

To become a “solo staker,” a staker needs the required 32 ETH minimum, a dedicated computer with 24/7 internet connectivity, specific software, and some technical “know-how.”

Staking pools can simplify the process for many and, at times, even offer better rewards.

The Pros and Cons of ETH Staking 

There are several pros and cons to consider when it comes to Ethereum staking:


Passive income: Staking Ethereum allows you to earn a passive income by holding your ETH in a staking contract. As a validator, you earn a return on your staked ETH in the form of ETH earned from transaction fees.

Increased network security: By participating in staking, you help to secure the Ethereum network and contribute to its overall stability and security.

Potential for higher rewards: Stakers that operate more validators and stake more ETH have a greater chance of being selected to validate blocks, which can result in higher rewards. Additionally, some staking pools offer rewards beyond the base returns for individual validators.

Lower energy consumption: Unlike proof-of-work mining, staking Ethereum requires significantly less energy and computing power, which is better for the environment.


Locked-up funds: When you stake ETH, your funds are locked up in the staking contract and cannot be accessed until you stop staking or the contract ends. 

Volatility: The value of ETH in fiat currencies is highly volatile, which means that the value of your staked ETH can change dramatically in a short period. Volatility can result in gains or losses depending on the market conditions.

Slashing risks: Validators can be penalized for malicious or incorrect behavior, resulting in a loss of staked ETH. Slashing means there is a risk associated with staking, and it is vital to understand the rules and regulations of staking 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 need more technical knowledge.

Most of the cons associated with Ethereum staking can be overcome by staking Ethereum via a liquid ETH staking pool.

What are ETH Staking APRs and APYs?

The ETH staking APR (annual percentage rate) and APY (annual percentage yield) refer to the returns you can earn by staking your ETH on the Ethereum network. The exact APR and APY can vary based on several factors, including the current market conditions and the amount of ETH being staked.

The current base ETH staking APR is around 4%, which means that validators can earn about 4% returns on their staked ETH over the course of a year. However, this is subject to change based on several factors, including changes in the total amount of staked ETH, changes to network fees, and changes to the overall demand for staking services.

The staking APY, on the other hand, takes into account the effects of compounding. Compounding refers to reinvesting earned rewards to generate additional returns over time. For example, if you make 4% on your staked ETH for one year and then reinvest your earned rewards, you will have a higher staked balance for the following year, which can result in higher returns.

The exact staking APY can be difficult to estimate, as it depends on several factors, including the amount of ETH staked and the time over which returns are compounded. However, some staking pools may provide estimated APYs based on historical returns and current market conditions.

It’s important to note that staking returns are not guaranteed and can be subject to volatility and other risks.


In conclusion, Ethereum staking is an attractive opportunity for ETH holders to earn more ETH by validating transactions. By staking their ETH, validators help secure the Ethereum network and earn rewards through transaction fees. Staking pools can help stakers earn higher rewards and mitigate the risks of running a validator node. 

Ethereum stakers can earn a base APR of around 4%, and the potential APY can be higher if earned rewards are reinvested. Understanding the risks associated with staking and being aware of the changing market conditions is essential before investing in staking.

People interested in staking may want to consider Hord’s liquid ETH staking platform.


Are Staking Rewards Taxable?

Staking rewards, like other forms of profit from cryptocurrency, may be liable for taxation. Laws and regulations regarding taxes on cryptocurrency tend to vary from country to country and even region to region at times. It is always recommended to look into local laws and taxation requirements before getting involved or investing in cryptocurrencies.

Can I use my Funds While I’m Staking ETH? 

While staking ETH, a stakers ETH is locked into a specific smart contract. As such, a user cannot transact with their Ethereum while it is locked into a smart contract. Liquid ETH staking platforms, however, provide stakers with a tradable “liquid” token they can trade with or use in DeFi ecosystems while staking.

How are Validators Chosen?

Validators are chosen to participate in block validation on the Ethereum 2.0 network through a random selection process. The selection process is designed to be fair and unbiased and based on a combination of factors. This includes the amount of ETH a validator has staked, the length of time the validator has been staking, and the overall network participation rate.

Validators with more ETH staked have a higher chance of being selected to validate a block. However, the selection process is also designed to be randomized, which means that even validators with relatively small amounts of staked ETH have a chance to be selected to validate a block.

How is the Staking APY so High?

Staking APY (annual percentage yield) can be high due to a combination of factors, including the overall demand for staking services, the total amount of staked ETH, and the network rewards structure.

Are Staking Rewards Haram?

Staking rewards can be a topic of debate in Islamic finance, as there is some disagreement among scholars regarding the permissibility of such rewards under Islamic law. Some scholars argue that staking rewards are similar to riba (interest), which is forbidden in Islamic finance.

However, other scholars argue that staking rewards may be permissible if they meet specific criteria. For example, some say that the rewards must be based on actual work or effort put into the staking process rather than simply being passive income. Others argue that the rewards must not be tied to a fixed interest rate but rather must be based on the overall performance of the network and the demand for staking services.

What is a Staking Reward in Cryptocurrency?

A staking reward is an incentive or compensation that cryptocurrency holders receive for “staking” or “locking up” their coins to support the network’s operations. Staking is the process of holding and maintaining a certain amount of cryptocurrency in a contract for a fixed period of time. Staking contributes to the security and maintenance of the network.

In a proof-of-stake (PoS) system, stakers can earn staking rewards through transaction fees for validating blocks on the network.

Who or What Pays Staking Rewards?

Staking rewards are generated by transaction fees on Proof-of-Stake networks. Validators earn all transaction fees from the transactions included in a block. 

Does the Staking APYs Change?

Yes, the APY associated with Ethereum staking can fluctuate and depends on various factors. For example, the factors can include the number of validators participating in staking and the number of pending transactions on the network.