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The coming "Merge" is arguably the biggest thing to happen to Ethereum in its existence. For investors, it promises to be even bigger. We've already talked about the potential for the token's price to skyrocket thanks to its new, more efficient validation method.
But the Merge will open up an entirely new way of making money on Ethereum because, as of September, it will be possible to beef up your ETH returns by staking it.
Ethereum is leaving behind proof-of-work, where miners earn rewards for securing the network, for proof-of-stake. In proof-of-stake "validators" lock up a certain amount of crypto and secure the network in the process.
And, as I hinted at a moment ago, it'll be possible for regular ETH investors to stake their crypto for a reward payout.
Generating income from crypto you already own isn't as easy as it was as recently as a few months ago. Thanks to the collapse of the TerraLuna ecosystem and the bankruptcies of interest-paying firms like Celsius and Voyager, many crypto investors have turned away from Defi, or decentralized finance.
Staking, on the other hand, carries much less risk. The main limitation is that only proof-of-stake cryptocurrencies offer it. And only about half of the top cryptos have some form of staking.
So, the ability to stake Ethereum, the No. 2 cryptocurrency, represents a major new opportunity for crypto investors. The current rewards are between 4% and 5%, depending on how you go about it.
Admittedly, that's not eye-popping, but it's a decent return, handily beating what a legacy bank or the S&P 500 will give you right now. (The actual rates will be determined by the total amount of ETH staked, and so could therefore rise or fall over time.)
But there are several things you need to know before you take the leap.
Ethereum Staking Is Not for the Fickle
First and foremost, staking Ethereum, at least for the first couple of years, is a commitment. You will need to be OK with locking up your ETH indefinitely.
People won't yet have the ability to end their stake and withdraw their ETH - that's planned for a future upgrade to Ethereum that's expected in six months to a year. But given the long delays we've seen with previous Ethereum upgrades, that timeline very well could stretch out much further. You've been warned.
And even when withdrawals are enabled, the network will only allow five or six validators to unstake per "epoch." While an epoch only last about 6.5 minutes, there are some 400,000 validators. If more than six validators want to exit, they have to get in line. Given the limit, it would take more than a year for all the validators to exit.
So be very sure you won't be needing the ETH you stake anytime soon.
By the way, the rewards you earn are also locked up - they're added to your staked ETH. You won't receive them until you're able to unstake.
For non-staking Ethereum investors, this is great news. It ensures that a portion of the ETH supply remains locked up and prevents a scenario in which many validators exit at once and "dump" their ETH on the market.
With that said, if staking ETH makes sense for you, there are several ways to go...
Here Are Your Options for Staking Ethereum
Even though the Merge hasn't happened yet, you can stake Ethereum now on the Beacon Chain (that's the testnet slated to be merged into the Ethereum mainnet in September).
You have four options of varying complexity and commitment levels:
- Become a validator: This is the most direct way to stake Ethereum, but it's not for everyone - HODLers only. The biggest obstacle is the 32 ETH requirement. At today's prices, that's more than $51,000 worth of ETH. And as noted above, you'll need to lock it up indefinitely. You'll also need a dedicated computer running the Linux operating system that's connected to the internet and can run 24/7. The beefier the specs, the better. And you should have at least some technical expertise. Here's a tutorial that explains the process. I'm not gonna lie, it's daunting, but if you're into crypto heart and soul, it may make sense for you.
- Staking as a service: With this option you still need to lock up 32 ETH, but you don't need to set up your own hardware. Instead you designate your ETH stake with a third-party operator. The operator takes a small cut of your rewards as a fee for running the hardware side. Once you've set up your account with the operator, you can monitor your progress in a dashboard. Staking-as-a-service providers include Abyss Finance, BloxStaking, Allnodes, and Kiln.
- Use an exchange: This is by far the easiest option. Using an exchange like Coinbase or Kraken bypasses the need for 32 ETH and the need for heavy computing firepower (on your end, anyway) but not the requirement to lock it up indefinitely. Staking Ethereum at most exchanges is simply a matter of clicking a button. Of course, most of the exchanges charge fees, reducing your reward. Plus you're entrusting your ETH to a third party, which is always somewhat risky. Besides Coinbase and Kraken, you can stake Ethereum at eToro, BlockFi, and Poloniex.
- Pooled staking: Here you gain maximum flexibility. Though engaging the services of a third party, the ETH remains in your custody. Not only is there no 32 ETH requirement, you don't have to lock up your ETH at all - you can exit any time. This can be accomplished a couple of different ways, but the most popular is though "liquid staking." This method uses an ERC-20 token as a proxy for the staked ETH and relies on smart contracts. Typically the ETH you designate reside in a browser-based wallet such as MetaMask. As with staking-as-a-service, the operators take a fee for their trouble. Pooled staking services include Rocket Pool, Stakewise, Lido, Ankr Staking, and Stafi.
Whether you decide to stake your ETH or not, the Merge is going to be a huge boon for investors. With so many tokens on sale right now, there's never been a better time to get into crypto.
In fact, there's a Wall Street insider - famous for being a conservative investor - who's even more bullish on crypto than I am. For a long time, he was a huge skeptic, but now he's saying it's the best investment opportunity to come along in the past 30 years.
Skybridge Capital's Anthony Scaramucci has a bold Bitcoin price prediction that's been making headlines, and you can see it right here, along with his advice on what every American should do right now...
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.