Ethereum Staking Guide: Solo, Liquid or Exchange Staking, Which Is Right for You?

In September 2022, Ethereum completed "the Merge," switching from proof of work to proof of stake. Since then, the network has been secured not by mining rigs but by validators who have staked ETH.

For holders, that opened a new option: stake your ETH to help run the network and earn rewards. But there are many ways to stake, and each makes different trade-offs between reward, convenience and risk.

Key takeaways

• Ethereum staking rewards come from newly issued ETH and a share of transaction fees, and have run at a few percent a year recently.
• Running your own validator requires 32 ETH and a reliably online machine.
• Liquid staking has a low barrier and tradable staking tokens, but adds smart contract and depeg risk.
• Exchange staking is easiest, but the platform holds your ETH, exposing you to platform and regulatory risk.
• Staking isn't guaranteed profit: slashing, exit queues and ETH's own price swings all matter.

How Ethereum staking works

Under proof of stake, validators lock up ETH as a security deposit, then propose new blocks and vote on others. Validators who do their job earn rewards. Those who misbehave or stay offline for long periods lose part of their stake.

Key milestones:

For the basics of proof of stake, see Ethereum basics: smart contracts, gas and PoS.

Four ways to stake

Solo staking: most decentralized, most demanding

Solo staking requires 32 ETH and a computer that stays reliably online, running both an execution client and a consensus client. You fully control your assets and rewards, and you contribute most directly to Ethereum's decentralization.

It's also the most demanding: power or internet outages reduce rewards, and configuration mistakes, like running the same validator key on two machines at once, can lead to slashing, where part of your stake is destroyed and the validator is forcibly exited.

Liquid staking: lowest barrier, most flexible

Liquid staking protocols pool many users' ETH and issue tokens representing the staked assets, such as Lido's stETH or Rocket Pool's rETH. You can trade these tokens anytime or use them in DeFi.

Risks to keep in mind:

• Smart contract risk: a bug in the protocol's contracts could put staked assets at risk.
• Depeg risk: the staking token can trade below ETH. During the market panic of June 2022, stETH could only be swapped for about 0.94 ETH at one point.
• Concentration concerns: if one protocol controls too large a share of staked ETH, it could threaten the network's decentralization.

Exchange staking: easiest, but "not your keys"

Staking on an exchange takes a few clicks, but the exchange holds your ETH. It usually takes a commission from rewards, and if the platform fails or freezes your account, your assets are affected.

Regulation matters too. In February 2023, Kraken settled with the SEC, paying a $30 million penalty and shutting down its staking service for US customers.

The risks of staking

1. Price risk: rewards are paid in ETH. If ETH's price falls, your holdings can still lose value in dollar terms.
2. Slashing risk: validators who break the rules lose part of their stake, whether they solo stake or use a service.
3. Exit queues: to keep the network stable, Ethereum limits how many validators can exit per period. When many want out at once, the wait can stretch from days to weeks.
4. Custody and contract risk: assets held by an exchange or a smart contract are only as safe as the platform and its code.
5. Stacked risk: using staking tokens as collateral, borrowing against them or "restaking" them adds a layer of risk each time. See where DeFi yields really come from.

Choosing what fits you

• You have 32 ETH, technical skills and patience for maintenance: consider solo staking.
• You hold less ETH and want flexibility: consider liquid staking protocols with long track records and multiple audits, but don't put everything into one.
• You just want simplicity: exchange staking is easiest; choose a reputable platform and understand that it holds your assets.
• You're very risk-averse: not staking is a valid choice too. Keeping ETH in a wallet you control is perfectly reasonable.

FAQ

How much can I earn staking ETH?

Rewards come from newly issued ETH and fee shares, and change with the total amount staked and on-chain activity. Recently they've run at a few percent a year. "Staking yields" advertised far above that usually stack extra risk on top.

Can I withdraw staked ETH anytime?

Since the Shapella upgrade, staked ETH can be withdrawn, but exits go through a queue that can take days to weeks. Liquid staking tokens can be sold on the market immediately, though possibly below ETH's price.

Can I stake with less than 32 ETH?

Yes. Liquid staking protocols and exchanges accept any amount. Some decentralized staking protocols have also lowered the ETH needed to run a node.

Can staking get my ETH stolen?

Staking itself won't, but fake staking websites, approvals to malicious contracts or giving your seed phrase to a "staking support agent" can. Double-check URLs before staking, and read how wallets get drained without a leaked seed phrase.

Summary

Ethereum staking lets holders help run the network and earn rewards, but no method is perfect: solo staking is the most decentralized but hardest, liquid staking is flexible but carries contract and depeg risk, and exchange staking is easy but hands your assets to a platform.

Choose based on how much ETH you hold, your technical skills and your risk tolerance, and don't let a few percent of yield hide the risks behind it. To learn how Ethereum scales, read what is Ethereum Layer 2? This article is for education only and isn't investment advice.