Everyone in the cryptocurrency space knows what Ethereum is but many don’t understand how to use it to its full potential. There is an abundance of different use cases for the network but many of the best ones center around finance. One of the most common ways to use the network is to deposit (stake) Ethereum and cryptos into various interest earning platforms and networks for interest.
Staking your Ethereum is a great way to earn passive income without needing to sell. You deposit coins for a fixed period of time to earn interest, much like a traditional savings account. The following discussion will break down the purpose of staking Ethereum and discuss if you should do it.
What is Ethereum?
Ethereum is the pioneer of general-purpose blockchains. It acts as a foundation for thousands of other applications and tokens. The most innovative part of Ethereum is its support of smart contracts, something that has been copied by many new cryptocurrencies like Binance Smart Chain and Solana. Smart contracts are programmable self-executing contracts written in code in the blockchain. They are the tools that a new class of brilliant software developers use to build complex applications on Ethereum and similar networks. Developers can also create their own tokens on the network, called ERC-20 tokens, and build them into their platforms.
Smart contracts allow for decentralized applications (DApps) like Uniswap, SushiSwap, Aave and Yearn Finance. These platforms provide lending, borrowing, staking for interest and other financial services. If you are used to the interest paid by your bank on a savings account, the figures most of these platforms boast would boggle your mind. Platforms like Sushiswap can earn you anywhere between 5% to 200% APY on your crypto. This activity is often called yield farming and for good reason. Stakers can harvest tremendous yields from their cryptos over time, but it can also be extremely risky. The relatively small possibility exists that they could lose their entire crop of cryptos.
Ether: Ethereum’s native cryptocurrency, Ether, is the fuel that runs the network. It is used to pay for the computational resources and transaction fees for transactions executed on the network. Generally, it ranks #2 in the crypto market cap rankings behind Bitcoin, and while its value lags far behind Bitcoin, the token has been surging for several years now.
Smart contracts: Programs stored on a blockchain that facilitate the exchange of assets between two parties when predetermined conditions are met are called smart contracts.
Ethereum Virtual Machine (EVM): EVM is the engine that understands the language of smart contracts, which are written in Solidity, the native programming language of Ethereum.
Decentralized applications (dApps or DApps): These digital applications or programs run and exist on a blockchain. DApps built on Ethereum can be developed for a variety of purposes including finance, gaming and social media.
Decentralized autonomous organizations (DAOs): Member-owned communities without centralized leadership are called DAOs; they can be created on Ethereum to allow for democratic decision making. This form of project management is popular among new crypto firms as they can bring the public closer to crypto while furthering their larger pursuits (the true message, use case and purpose behind the project.) Often, a DAO is what allows the project to continue moving forward because users (and the public at-large) are invested in the DAO’s message.
What Can You Do With Ethereum?
Ethereum offers many possibilities for usage because smart contracts enable developers to have nearly endless options for types of applications. However, the platforms with the highest incentives for users have succeeded the most, so DeFi remains the king of Ethereum. In early September 2021, nearly $89 billion worth of cryptocurrency is staked in hundreds of different DeFi protocols. The application with the most funds locked now is Aave, the leading decentralized lending and borrowing platform. Aave lets you deposit cryptocurrency as collateral to borrow a different cryptocurrency. It supports 29 different cryptos and offers some of the lowest borrowing rates in the entire DeFi ecosystem. This is why you should learn how to stake Ethereum.
Recently, a popular use of the Ethereum network has been to mint, trade and follow the progress of non-fungible tokens (NFTs). The NFT craze must seem absolutely bonkers to most people. It’s hard to wrap your brain around investors buying and selling pictures for millions of dollars that anyone can see or save. Algorithmically generated profile pictures such as CryptoPunks, Bored Apes and Pudgy Penguins can easily sell for prices higher than most people’s houses or cars. Many new investors have made millions of dollars on NFTs in the past few months with tiny starting investments. The profit potential right now seems higher even than most of the opportunities in DeFi. However, because NFTs need to be at least relatively scarce to be so valuable, it may be difficult to sell them during a market crash.
How To Use Ethereum
Are you looking for the easiest way to start using Ethereum today? Follow these 4 easy steps.
1. Buy Ether tokens.
Ether is available for trading on a myriad of trading platforms. Nearly all cryptocurrency exchanges offer the token and even some brokerage applications have it too. Some of the best platforms to buy Ether on are Coinbase (NASDAQ: COIN), Gemini, Webull and Robinhood (NASDAQ: HOOD). After you sign up for an account with the platform you choose, you need to verify your identity before you can start trading. This process generally entails providing your Social Security number, address and a picture of your driver’s license. Once your identity is verified, you can fund your account with fiat currency or another crypto. Set the price and make your purchase.
2. Download an Ethereum wallet.
You don’t need an Ethereum wallet to speculate on the token’s price, but you need one to use the network. There are 2 main types of cryptocurrency wallets: software and hardware. Hardware wallets are typically the most secure, but they can be clunky to use with platforms on Ethereum. Software wallets are usually free and incredibly easy to use. One of the best software wallets available is Coinbase Wallet. It is supported by a wide range of applications on Ethereum and has more features than most of its competitors. It has a trade tab where you can trade your cryptos for fiat or other cryptos, a place to store your NFTs and a DApp browser to easily use DeFi platforms in the app.
3. Send your Ether to your Ethereum wallet.
If you paid with USD from an instant deposit, you may have to wait a few days to move your Ether. You’ll need to find the Ethereum address of the wallet you want to transfer the Ether to. You can often find it by clicking a button in the app labeled receive, deposit or something similar and then selecting Ethereum. The address should start with “0x” and be quite long. Once you are ready to transfer your tokens, find the withdraw or send button on your trading platform. Enter in the Ether address you found in your personal wallet and hit send.
4. Connect your wallet to a Web3 enabled website.
You’ve already done the hard part. Now it’s time to reap the rewards. Navigate to whichever DApp on Ethereum you want to use. Some of the most popular right now are Uniswap and OpenSea. Uniswap is the go-to platform for many crypto investors who want to swap cryptocurrencies or stake theirs for interest. OpenSea is a top NFT marketplace where users trade and keep track of their favorite collections like CryptoPunks and Bored Ape Yacht Club. If you are looking for a good place to start yield farming, check out our list of the top DApps for that. You may want to check the useful website Eth Gas Station to see what the transaction fees are going to cost you. Once you find the platform you want to use, click Connect Wallet and sign in; you should be all set. If you want a more in depth guide on how to stake Ethereum on either ETH 2.0 or decentralized finance (DeFi) platforms, keep reading!
How Does Earning Interest on Crypto Work?
You can use a few different ways to earn interest on your cryptocurrencies, but most are quite similar. There are 2 main types: ETH 2.0 staking and DeFi staking. You can think of both like earning interest on your fiat money (like USD) in a savings account. The bank lends out your cash to other people or institutions and pays you a small return for your trouble. Crypto staking, or yield farming, is often exponentially more profitable than the interest you earn on a savings account. Some traditional banks will pay you 0.1% a year for holding fiat currency whereas staking certain cryptos on some decentralized applications (DApps) can earn you tens or even hundreds of percent per year. Learning how to stake Ethereum and other cryptos may soon be more important than creating interest earning bank accounts.
In the last few years, thousands of yield farming platforms have sprung up on Ethereum and rival networks like Binance Smart Chain. It might seem easy to start earning lots of interest on your cryptos immediately, but you have to be careful. When you invest, you should either be completely sure of the safety of a platform (which is impossible for most) or be willing to lose your entire deposit. It can be an incredibly time-consuming and arduous task to sort through them all to find safe platforms with high APYs.
At the same time, you may want to only stake one token while holding all your other investments. Don’t feel as though you must throw yourself into the staking space with all your investments at once.
What is Ethereum 2.0?
Ethereum 2.0, now referred to as The Merge, is an upgrade that aims to improve the scalability and security of the Ethereum network. The upgrade will move the Ethereum network from a proof-of-work (PoW) consensus algorithm to a proof-of-stake (PoS) one where network validators can verify transactions and stake their assets.
At its core, the Merge to PoS will reduce network energy usage by at least 99.95%. Other benefits of the Merge include:
- PoS makes participating in the network more accessible for many users, not just large miners.
- More equal distribution of network rewards to incentivize good behavior opens up yield to more users.
- The lack of mining will cause Ethereum’s overall coin supply to dwindle, which should push up its price.
What is Ethereum 2.0 Staking?
Staking on ETH 2.0 is considered a public good for the Ethereum ecosystem. It involves locking up ETH (Ether) to secure the network and earn rewards in the process. Currently, more than 11.5 million total ETH is staked, a significant portion of the entire circulating supply.
However, unlike staking other assets, you have to commit your coins for a longer period of time when staking ETH. Ethereum’s new PoS system is not yet operational on its main network, meaning that staking ETH is currently a one-way street.
Nonetheless, when you stake Ethereum, you’re effectively locking your coins up until the upgrade is complete, which could be 2023 or beyond. Some crypto exchanges may let you sell your staked Ethereum tokens; however, it is best practice to assume you’re committing them for the long haul. One major benefit of ETH 2.0 is that you don't need to learn how to stake Ethereum on complicated decentralized finance (DeFi) platforms.
Why Stake Ethereum?
Three primary reasons to stake your Ethereum include:
Earn rewards: In the Ethereum network, rewards are given for actions that help the network reach consensus. In terms of staking ETH, you will be rewarded for helping secure the network. ETH staking rewards are given in accordance to how much ETH is validated and what rewards the network is offering over a time period.
When there is very little ETH staked, the protocol rewards will be greater as an incentive for more ETH to come online. Conversely, an increasing amount of ETH is staked, the reward will be reduced. View the current amount of ETH staked and current APR here.
Think of this as another way to set up a savings account—along with a simpler way to hold your crypto and earn. You don’t need to be an active trader to make something of your holdings, and staking may be the best way to do it.
Better security: The network becomes stronger against attacks as more ETH is staked, as it then requires a larger amount of ETH to control a majority of the network. This circumstance benefits the wider community and all individuals in the Ethereum ecosystem.
More sustainable: Staking Ethereum is more eco-friendly compared to mining because stakers don’t need energy-intensive computers to participate in a PoS system.
How to Stake Ethereum on ETH 2.0
You can use four different ways to stake your ETH. The option you choose depends on how much ETH you are willing to stake.
Solo home staking: Solo staking on Ethereum is considered the gold standard. Essentially, it is the act of running an Ethereum node connected to the internet. This method provides complete participation rewards, improves the decentralization of the network and never requires trusting anyone else with your funds.
Those considering solo staking need to have at least 32 ETH and a dedicated computer connected to the internet 24/7. Ideally, some technical know-how is helpful; however, easy-to-use tools can simplify this process.
Staking as a service: Staking as a service (SaaS) is a category of staking services where you deposit your own 32 ETH for a validator but delegate node operations to a third-party operator. This method allows you to avoid the hard part of the process while still earning native block rewards (ETH). However, a monthly fee is often required in addition to a certain level of trust in the provider. A great place to stake ETH is on Gemini, although Coinbase offers the same service at a slightly higher cost.
Pooled staking: If you are not comfortable with staking 32 ETH, you can take part in several pooling solutions that exist to assist users. Staking pools are a collaborative approach that allows those with smaller amounts of ETH to obtain the 32 ETH required to activate a set of validator keys.
Many of these options include what is known as liquid staking, which involves the use of an ERC-20 liquidity token that represents your staked ETH. However, since pooled staking is not native to the Ethereum network, you face inherent risks associated with the third parties building these solutions.
Centralized exchanges: Lastly, many centralized exchanges such as Coinbase Global Inc. (NASDAQ: COIN) provide staking services if you are not comfortable with holding ETH in your own wallet, allowing you to earn yield on your ETH with minimal effort or oversight.
However, the implication here is that centralized providers consolidate large pools of ETH to run a large number of validators. This practice is dangerous for users of the network because it creates a large centralized target and point of failure, making the network more susceptible to attacks or bugs.
How to Stake Ethereum on DeFi Platforms
Ethereum 2.0 isn’t the only place you can stake Ethereum for high interest rates. The blossoming decentralized finance ecosystem on Ethereum enables earning great rates on all kinds of cryptos including Ether.
Yearn.finance is one of the largest DeFi platforms on Ethereum and has more than $604 million worth of crypto assets deposited in its pools. Yearn found its way to the top by offering more than most other yield farming applications. It hires brilliant software developers to actively manage the strategies used to earn its users’ yields. Yearn has 64 different pools that it calls vaults. Most of these vaults are significantly less risky than many DeFi platforms because they only have 1 crypto in them. Single asset pools don’t suffer from impermanent loss, which is common in pools with 2 or 3 volatile assets in them.
yearn.finance: ~8% APY on Ethereum with the Curve sETH Pool
Yearn has multiple great stablecoin pools earning between 1% to 100% APY, depending on the token. If you have extra DAI, USDT, USDC etc., you should consider depositing some into one of these vaults to earn passive income. However, the stablecoin pools aren’t the only pieces of brilliant technology on the yearn.finance platform. It has more than 30 vaults tightly integrated with Curve Finance, one of the other kings of DeFi.
A popular example is the Curve Synthetic sETH pool. Synthetix is a derivatives liquidity protocol. Synthetix allows users to mint stablecoins that track the price of other assets. For example, sETH is a stablecoin pegged to the price of Ethereum. When you deposit your crypto into this pool, Yearn swaps your asset to Ethereum and Synthetix Ethereum (sETH) and deposits it into Curve. The pool uses 2 different strategies that Yearn DeFi experts actively manage to ensure the highest profit. At the time of writing, the pool is earning an incredible 8% APY, which is astounding for Ethereum and much higher than the application’s top competitors.
You might be wondering why depositing into the Yearn Curve sEth vault is better than the regular Curve sETH pool. Yearn’s vaults bring a few major benefits, mostly from sheer size. The first is simple; Yearn vaults compound the interest you earn by depositing it into the pool regularly without you having to pay transaction fees. Ethereum fees can be so high that compounding often isn’t profitable.
The second main benefit is more complex. Curve has another pool for the Curve token (CRV) called the Locker where you can stake CRV and lock it for up to 4 years at a time for large benefits. Stakers get a boost to the rewards on their other liquidity pools depending on how long they lock and how much CRV they deposit. Using another of Yearn’s vaults, the “Backscratcher,” they deposit a large amount of CRV to the Locker and lock it indefinitely, distributing the boost to various vaults.
How to Stake Ethereum and Other Cryptos
Looking for the easiest way to get started earning interest on your Ethereum or other tokens? Check out this quick and easy guide.
Step 1: Open an online account.
Before you learn how to stake Ethereum, you need cryptos to stake. You also need Ether to pay for transaction fees on the network. Some of the best trading platforms to purchase cryptos include Coinbase (NASDAQ: COIN), Robinhood (NASDAQ: HOOD), Webull and Gemini. Before you can start trading on any of these platforms, you need to verify your identity. Generally, this process requires you to provide your address, Social Security number and a picture of your driver’s license.
Step 2: Purchase cryptocurrency.
As soon as your account is verified, you can deposit your funds and purchase cryptos. All the platforms recommended above have instant deposits so you can start trading immediately. You may have to wait until the deposit clears before you can transfer the cryptos off the platform. Now, look for the trading pair with the crypto you want to buy, set your price and make your purchase.
If you don’t already have a personal wallet, either hardware or software, you need to get one to use DeFi platforms like Yearn. Hardware wallets are safer than software wallets, but they can be a bit clunky, especially for day-to-day use. Ledger and Trezor rank as 2 of the best and most secure hardware wallet brands. Software wallets are usually free and incredibly easy to use. A great software wallet is Coinbase Wallet because it has more functionality than nearly all of its competitors. When you are ready to deposit your funds in a DeFi protocol, you have to send the crypto (and some Ether to pay for transaction fees) to your personal wallet.
Step 3: Earn interest on your crypto.
Now that you have the crypto in your wallet, navigate to the DeFi platform and click Connect Wallet. Click the type of wallet you want to use and accept the connection in your wallet when it pops up. Once your wallet is connected, find the pool you want to deposit into. If you are using Yearn, you don’t need the exact crypto in the vault. You can deposit ETH, WBTC, USDC, DAI, or USDT, and it will automatically swap it for the vault token. Yearn has no lock-up times, so you can withdraw whenever you want, although beware that Ethereum transaction fees will probably be expensive.
Alternatively, you can skip the wallet process all together and use Hodlnaut. Hodlnaut lets you earn interest on your Ethereum without needing to use DeFi applications on Ethereum’s blockchain.
The Hodlnaut interest account lets you put your digital assets to work. You can earn over 12% annual interest on stablecoins, and the platform offers options for Bitcoin, Ethereum, and Wrapped Bitcoin as well. Hodlnaut offers higher rates than competitors, and you don’t need to stake another token to unlock the highest rates, which is a requirement on some other exchanges. Rewards from Hodlnaut are paid out weekly. If you use Hodlnaut you won't even need to learn how to stake Ethereum.
Best Ethereum Wallets
Ethereum users and everyone who owns even 0.1 Ethereum should get a personal wallet of some kind. Those who use the network already or want to stake Ethereum need a quality wallet even more. The problem is that there are tons of different wallets to choose from. Here is our list of the best Ethereum wallets for holding cryptos, staking Ethereum and more.
Ledger Nano X
Ledger’s Nano X is among the most popular hardware wallets, providing you with maximum security by storing your tokens offline. It supports a very wide range of tokens, including Ethereum’s Ether, Bitcoin and many more. The Ledger Nano X even offers Bluetooth connectivity that allows you to purchase tokens and download over 1,000 supported decentralized applications directly to your device’s hardware. While the relatively high price tag might be too expensive for some users, the Ledger Nano X is our top choice when it comes to security considerations. It's easy to stake Ethereum with Ledger wallets because you can add your hardware wallet to your MetaMask account.
Trezor Model T
The Trezor Model T is another option for offline cold storage, which provides enhanced security over online wallets. The Trezor Model T is ideal for users who need to manage their crypto on-the-go but who aren’t comfortable with a hot wallet that requires an internet connection to use. The Model T features a unique touch-screen design, which gives you access to your tokens without connecting to the internet. The Model T also supports a wide range of tokens, including Ether and other ERC-20 offerings.
Exodus differentiates itself by supporting tokens on several blockchains, including Ethereum, Bitcoin and Tezos. The wallet is a free software wallet that helps investors store, earn interest, and use their digital assets in practical ways. It’s available on both desktop and mobile, and Exodus has several apps integrated in its wallet that makes using your digital assets easy. The wallet supports major cryptocurrencies like Bitcoin, Ethereum and Dogecoin, as well as 150+ other digital assets. Unlike most software wallets, Exodus also allows investors to buy and sell cryptocurrency directly from their wallet.
ZenGo is a mobile application wallet that provides a full suite of features to its users. ZenGo is designed to be easy to learn for beginners in cryptocurrency, but it offers access to DeFi products for the more advanced users as well.
ZenGo wallet is custodial, which means that ZenGo handles your private keys for you incase you lose access to your wallet. While many new users find this helpful, others prefer to take custody of their own private key to ensure maximum security.
ZenGo offers 1 click customer service, which is another huge win for beginners and experts alike. Overall, ZenGo is a great hot wallet for DeFi users and interest-earners alike. Just remember, hot wallets are the equivalent of a daily carry, whereas cold storage wallets are more like a safe for the bags you don’t want anyone getting access to.
If you want to trade your cryptocurrency frequently, you’ll probably want to keep the majority of your Ethereum tokens in your trading account. This is because each time you move any cryptocurrency from your brokerage account to a digital wallet, you’ll lose a small amount of cryptocurrency to gas the transaction. This gas fee goes to proof-of-stake validators on the Ethereum network who verify your transaction and ensure that you have enough Ether in your wallet to complete the transaction you request.
There are dozens of cryptocurrency brokers offering access to Ether trading and investing. Some of the factors you’ll want to consider when you compare brokers might include:
- The cryptocurrencies beyond Ether that your broker offers access to
- Your trading platform and the analysis tools that you can use to explore opportunities
- Stock and cryptocurrency screeners and charting options
- Access to additional asset investing and trading (like stocks or precious metals)
- Security features (like 2-factor authentication, multi-sig technology and encryption)
- Commissions, account maintenance fees and transfer fees
Risks of Staking Ethereum and Earning Interest on Crypto
The hazards of earning interest on cryptos are nearly completely platform-dependent in DeFi. However, you risk losing direct control of your funds with almost all of them. Many investors have been caught in the trap of chasing the highest APYs while losing sight of the risks that come with crypto staking. For example, liquidity pools with volatile altcoins can be extremely risky due to impermanent loss. Simply, impermanent loss is the difference in value you would have if you just held the cryptos instead of staking them in a liquidity pool. The code behind the DApps can also be faulty, allowing for cyberattacks and other ways to lose your deposit. This type of loss is usually called smart contract failure, and, even though it’s rare for well-audited applications, it’s always possible.
A DeFi platform provides some services similar to legacy financial institutions, but it should be noted that it lacks consumer protections commonly associated with bank accounts. Cryptocurrency, a form of digital currency, is innately volatile and thus possesses a risk that prices could fluctuate wildly. Unlike fiat money in a bank, digital currency is not legal tender in most countries and is not backed by any government.
Staking on Ethereum 2.0 also has risks associated with it but it is generally safer than staking on DeFi platforms. These risks include pool slashing where a validator pool acting maliciously is punished by burning a portion of the Ethereum staked in it. This is rarely an issue as any halfway decent pools ensure that this never happens to them.
Two types of governmental protection exist for bank- or brokerage-held consumer funds: the Federal Deposit Insurance Corporation (FDIC) protects against loss of your insured deposits if the bank fails; the Securities Investor Protection Corporation (SIPC) protects against the loss of cash and securities held at a financially-troubled brokerage firm but not against the decline in value of your securities. Cryptocurrency funds don’t fall under FDIC or SIPC protection.
Crypto interest is not a risk-free product, and, unlike money in a bank account or Certificate of Deposit, loss of principal is possible. If cryptocurrency prices fall or a security breach occurs, profits made from earning interest could be wiped out. Therefore, don’t invest more in cryptocurrency interest accounts than you can afford to lose.
Is Staking Ethereum Worth It?
Staking Ethereum and earning interest on safe platforms can be an incredible move because it’s basically “free money.” Of course, risks are involved in depositing your money into any crypto-interest-earning platform, especially those with mediocre security. However, risks can be minimized with applications like Yearn that have been audited multiple times. If the platform is safe, you might as well try to earn 5% to 30% interest on your tokens.
Frequently Asked Questions
Questions & Answers
Ethereum is the second largest cryptocurrency in the world by market capitalization. The Ethereum network was the first general purpose blockchain and is easily the most popular hub for decentralized applications.
Staking Ethereum is a great idea for many investors because it is one of the best ways to earn passive income from just holding the token. However, it does come with significant risks that vary on where the Ethereum is staked.
Besides Ether tokens, Ethereum wallets support all types of cryptocurrencies that use Ethereum’s network. This means you can store most non-fungible tokens (NFTs) as well as any ERC-20 tokens in your Ethereum wallet. Some notable ERC-20 tokens are Uniswap, Aave, MakerDAO, Curve and Chainlink.
No, you don’t need an Ethereum wallet to invest in Ethereum. You can buy Ethereum on exchanges like Robinhood, and you won’t need an Ethereum wallet to do so. However, if you don’t have an Ethereum wallet you won’t be able to earn interest on your crypto holdings through lucrative decentralized finance (DeFi) programs.
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