Ethereum 2.0 staking is the latest and hottest way to earn passive income as a node validator, it boasts high and predictable-ish returns that are attracting many investors and allowing to earn secondary products such as erc20 tokens or collateral loans in order to stay liquid while the funds are locked up. Eth2 staking will likely introduce new DeFi yield farming strategies, bringing along new and unprecedented DeFi hacks.
In this article we present a survey of the main staking solutions out there, as well a detailed costs and profits analysis in order to help readers choose how much they should stake based on the expected returns, or whether they should opt for other investment vehicles. We will also describe the risks and benefits involved with each particular staking strategy so that readers can make informed decisions.
This is not a technical article about how to set up a node validator, but rather we present Eth2 staking from a practical and financial point of view, so that readers can decide if staking is worth their time and money, without getting into all the technicalities of Ethereum 2.0 itself.
Table of Contents
- Staking Economics
- Staking Rewards
- Calculating Average APR
- Staking Risks
- Staking Solutions
- Personal Validator Nodes
- VPS Validator Nodes
- Pre-configured Staking Hardware
- Validator-as-a-service Providers
- Staking Pools
- Lending Platforms
The interest rate for the first year of Eth 2.0 (December 2020 — December 2021), can be estimated to be 9.45%, in the second year the rate will be 4.9% but never drop below that, that is 7.2% interest on average for the first two years of operation, note that this is the absolute minimum stakers will receive.
In order to incentivize those that have ETH to stake in the network, validators will be rewarded for performing their assigned duties. Every 6 minutes, a validator is assigned a duty and is rewarded if it is performed.
This amount of ETH that is rewarded to stakers is a sliding scale based on total network stake, the payout rate can be represented by the following chart from the official Eth2 launchpad:
The current amount of total ETH staked is 800,000 which yields a 17.5% APR (Annual Percentage Rate). This return rate is expected to go down as the ETH amount increases, following the curve shown on the chart.
Calculating Average APR
There are some profit calculators that readers can use in order to estimate profits, the eth2 Calculator is the official resource if the Ethereum foundation. The eth2 calculator is meant to be highly customizable and is suited for any validator wishing to run their own infrastructure through an at home computer or by using a VPS. Many assumptions can be made in this model about the state of the network at any given point in time.
The total APY validators will earn varies based on the total amount of ETH that is staked, but in order to know how much this will be on average for the first two years of operations requires making a few assumptions, i.e. it is an educated guess.
The reason we want to find the average APR, is so that we can subtract the cost of running a validator from it in order to find out the net profit for the first two (minimum) years of operation.
- Validators are required to stake 32 Eth in order to become a validator, and this amount (or more) can’t be withdrawn for about two years, i.e. users must be aware that they must keep validating in order to make profits and two years is the minimum time required (one can opt-out from being a validator before two years but will stop receiving interests and funds will still be locked).
- There is a maximum amount of 900 validators per day who can join the network and a maximum amount of ETH that can be staked at any one time, the extra demand gets put in a waiting queue and absorbed with time. At maximum churn rate, the queue can absorb up to 11 million ETH by December 2021, where the return rate will flat out and stay at 4.9%.
Given the genesis block we can now calculate the absolute minimum return stakers will receive (because there’s a 4 validators per epoch limit to how quickly new stakers can join), i.e. it is possible to estimate the average APR for years 1 and 2, the tweet shown in the picture below shows the estimated returns:
That averages out to about 9.45% APR for first year of staking per validator and 4.9% fixed APR for year two, the first two years average is 7.2% APR. That is, without counting the (likely) appreciation in value of ETH.
Estimates range from $120 to $1600 per year, a higher starting cost is usually associated with running your own hardware and lower starting cost with using a staking service, the latter option however will diminish profits over time in the form of fees ranging from 10% to 15% of APR.
Uptime and Maintenance
Users can stay net-positive in earnings if they are online >50% of the time. If greater than 1/3rd of the network goes offline at once and this continues for over 25 minutes, all offline validators will incur finality leak penalties.
Capital acquisition and lockup
The user must acquire the necessary 32 Ether and send a one-way transaction to the deposit contract. This is not the case when staking using custodians or pools, plus additional rewards in the form of tokens can be earned.
By staking your ETH, you are trusting the staking software you are running on to perform its duties accurately. However, with block explorers and validator dashboards, it will be easy to see if anything is going wrong. It is the implementors role to create functional software that can work reliably.
This risk is similar to the risk of getting Ether stolen from a wallet due to a hacked laptop or smartphone.
There are two main categories of staking solutions that users may choose from:
- Solo staking, i.e. hosting a private validator node
- Delegating the task of running validators to an third-party service provider
The table below summarizes the risks and benefits of all the different staking solutions out there, both solo staking and delegated, each solution will be described in detail afterwards.
Table 1. A taxonomy of blockchain related security vulnerabilities.
Personal Validator Nodes
The preferred staking solution by the Ethereum community is to stake by hosting your validator node using your own hardware, this promotes decentralization and therefore security of the network. This means having a self-run node running on some hardware in your own home, common hardware choices include:
- NUC or Mini PC
- Raspberry Pi
The preferred solutions from the community are NUCs or a used Server, the server however takes up space and is noisy. Another viable solution is a Raspberry Pi with 16GB of memory, it is thought however that its CPU may not be able to handle workload as the ETH 2.0 chain evolves. Desktops and laptops are just not cut for the job, or unnecessarily expensive if run as a dedicated machine for the validator node. See the references for more information on hardware requirements for validators.
VPS Validator Nodes
Staking by outsourcing hardware, broadband and electricity to an external provider by using a VPS. This is easier to maintain but it delegates risk to third parties and promotes centralization, so if one of these providers goes down and therefore greater than 1/3rd of the network goes offline at once and this continues for over 25 minutes, all offline validators will incur finality leak penalties, i.e. they may lose most of their staked amount.
Personally, I like the option of having my own hardware at home, which is also much cheaper than a VPS; 6 months of VPS provider can cost as much as a brand new MiniPC. However, keeping a MiniPC attached to the LAN cable at home may just not be feasible for whatever reason, therefore a VPS is the next best option.
It takes time to evaluate the different providers offerings out there, so we will compare them for the reader right here by calculating the operating costs of running a validator node on different VPS providers. For a detailed guide to hardware requirements for both personal computers and VPS, we recommend reading this guide.
In order to calculate VPS costs, we need to make some assumptions about hardware requirements, there are different opinions out there on what should be the minimum required, after reading many of those, we chose a setup that meets these requirements and that is not likely to change for at least a year:
- Processor: Intel Core i7–4770, i.e. a CPU with a passmark score above 7000.
- Memory: 8GB RAM
- Storage: 100GB SSD
With the above specs in mind, we can calculate the cost of running an Eth 2.0 validator node and therefore the net profit of running such operation. We also calculated the costs for extra storage per month; according to some estimates, only 100GB is necessary for the first year of the Eth 2.0 launch, the space required however may grow no more than 100GB per year, this means that the cost of running a VPS will scale with the amount of storage required.
Keep in mind also that running a validator may also require an upgrade in memory in the near future, and that generally the cost of a VPS instance will more than double by doubling the number of cores and memory, i.e. in year two the total cost in the table below may double.
For calculating costs we used the following instance pricing calculators:
Other assumptions we made when calculating the costs include the pricing model, for which we chose the cheapest ‘savings plan’ for each provider, where the whole cost for one year of VPS must be paid upfront. We also chose the cheapest region for our VPS servers which can impact on the cost significantly, e.g. the cheapest zone in AWS is called US East (N. Virginia).
From the above table, the clear winner is Contabo; for as low as 5 USD per month you can run a private Eth 2.0 validator! I am personally biased towards AWS ec2 because I’ve been trusting it for years, but given the massive price difference I would definitely try out Contabo; for some peace of mind, make sure to enable monitoring tools so that the uptime and speed of the node can be monitored.
Pre-configured Staking Hardware
This option is similar to the previous one, as it involves running a validator from a private home, however with this option there is no setup and hence technical expertise required, the hardware is basically plug and play, but it still needs to be monitored for uptime and reliability.
Avado is a MiniPC pre-configured with a proprietary OS and uses the Prysm client. It also supports staking on multiple blockchains. There are different models available, but only two of them meet the minimum CPU benchmark recommended, the cheapest one out of the two is called Avado i5 and costs 1099 USD.
Launchnodes Is a preconfigured AWS EC2 instance, the cost is 1,188 USD per year and the instance specs are not clear; personally for that price I’d prefer choosing my own custom hardware, at the expense of some initial technical setup.
This solution will let professional investors stake while also keeping control over the private Ethereum keys needed for withdrawal.
The following API solutions are aimed at institutional and professional investors, that is why they offer and API for more powerful and granular control over staking options, which will include:
- Offer staking services to customers
- Stake institutional ETH holdings
- Stake personal ETH holdings
You can securely stake your tokens with Bison Trails’ non-custodial public validators, offering the same enterprise-grade infrastructure
- Delegate to Bison Trails’ public validators
- Earn rewards on your delegated tokens
- Pay a small percentage of these rewards (Bison Trails’ service fee rate) for the service
- Unbond your tokens at any time (subject to the protocol unbonding period)
Codefi Staking provides a white-label, turnkey solution for businesses that want to stake on Ethereum 2.0. Currently it is open to early-adopters only.
We enable our clients to stake their own ETH or their customers’ ETH without needing to run their own validator infrastructure. The result is reduced technical risk and increased rewards generation on the Ethereum 2.0 network.
Staked’s robust suite of ETH2 infrastructure and tooling make it easy for large ETH holders, institutional investors, custodians and exchanges to participate in ETH2 staking.
Staking and lending are both non-custodial. You are always in complete control of your private keys and funds throughout the staking and lending processes. You are free to undelegate or withdraw your funds at any time, subject to the lock-up requirements for each protocol.
Staked developed a Node Provisioning API, which allows partners to programmatically spin-up nodes for staking. Partners specify the number of nodes needed and receive a transaction to sign that stakes with those node/s.
By depositing ETH into Stakewise, you will participate in Ethereum 2.0’s Proof-of-Stake consensus mechanism (staking) and receive ETH rewards in return. With stakewise you can:
- Deposit ETH together with others to share a validator
- No limits — stake any amount
- Track your earnings in real time
- Use your stake in DeFi with StakeWise tokens
- Go solo with own withdrawal key and our infrastructure:
- Available for deposits of 32 ETH
- Full control of withdrawal key and validator exit
- Best in class pricing with no compromise on security
- Mint Deposit Tokens and Reward Tokens for every ETH you deposit and earn.
- Enables withdrawals from staking before Phase 2
- Opens opportunities to generate additional yield
Stakefish is non-custodial eth2 validator-as-a-service, the minimum staking amount is 32.1 ETH; 32 for the validator and 0.1 as a staking fee. Funds can be withdrawn after phase 1.5, i.e. up to two years.
Staked offers a UI and dashboard for everyday investors, it offers a yearly one-off payment of $60 or a monthly one of $5.
Blox Staking is a decentralized (non-custodial) and fully open-source eth staking platform. Blox only holds the user’s private signer keys that can only be used for executing validator duties. Users can manage multiple validators via a dashboard.
The service will cost $180 until phase 1.5 for one validator, but there are discounts for running multiple validators.
Staking pools run validators-as-a-service with the difference that any amount can be invested below the required 32 ETH, it is also fully transparent and verifiable on chain.
Most staking pools offer ERC20 tokens as a reward for staking with them, these tokens are tradable on the ETH 1.0 chain.
- Decentralized and transparent
- Very low minimum investment amount, ranging from 0.01 to 0.5 ETH
- Relatively high exchange fees, ~10% of earnings.
- Distribute dividends on staked ETH in the form of ERC20 tokens
- Funds locked until phase 1.5 or 2
- Most of them are still in beta
- Subject to smart contract risks
With Rocked Pool users Deposit as little as 0.01 ETH and instantly receive the rETH token which represents, this token does not need to be locked to gain rewards and traded from the moment they deposit ETH. Rocket Pool is still in beta
Distinguishing feature : All rETH holders share the risk of nodes being slashed or penalised equally; if a node fails, all holders lose a tiny amount of value.
Stkr is another decentralized staking network for Ethereum, which is matching node validators and users.
As other staking pools, users can begin staking starting from 0.5 ETH and earn tokens, the fees however are set at 12.5%.
Distinguishing feature : users can also choose to join the network as node validators in order to earn some interest and extra tokens, but this will require staking a minimum of 32 ETH.
StakeWise offers erc20 rewards, no minimum staking at a 10% fee rate.
StakeWise also offers an API and smart contracts that can be integrated into any application to help its users stake ETH effortlessly.
Distinguishing feature : users earn two separate erc20 tokens; they mint Deposit Tokens and Reward Tokens for every ETH you deposit & earn.
Distinguishing Feature: Lido maintains a whitelisted set of trusted node operators in order to minimise slashing risks.
Lending platforms allow their users to stake ETH while at the same time borrowing funds against their staked ETH, hence leveraging their position in staked ETH.
Currently, the only lending platform available allowing to use staked ETH as loan collateral is LiquidStake.
The platform allows users to take out loans in USDC, an erc20 token that highly liquid and pegged to the US dollar value.
LiquidStake is a platform providing the solution for ETH holders who wish to stake on the Ethereum 2.0 blockchain without sacrificing the liquidity of their funds.
In essence, LiquidStake pools clients’ funds together and delegates them to API solutions from various validator-as-a-service providers including Bison Trails and Consensys CodeFi.
Read more about LiquidStake in this article.
- Borrow USD value up to 50% of your collateralized ETH value in the form of USDC.
- Collateral is automatically liquidated to pay back the loan if a margin call of 60% is reached.
- No penalty incurred if liquidated.
- No technical responsibilities.
- No minimum stake amount.
- KYC Required
- Custodial (centralized)
- No erc20 token rewards
This is the easiest way to stake, however it is completely untransparent and users will not have control over their funds until they can be withdrawn, exchanges and custodians will also ask for the highest interest rate.
Additionally, most exchanges have not announced any Ethereum Staking offerings yet and it is unclear how they will deal with the funds locked until phase 2.
Coinbase, Binance and Kraken
Only rumors, not officially announced yet. It is likely they will announce something in the next month or so.
Bitcoin Suisse is a fully regulated exchange, which allows staking of any ETH amount and full transparency by tracking rewards in their staking portfolio dashboard.
There is a minimum staking amount of 1 ETH and the fee is 15% of the rewards.
There are many things to consider for one to become a validator. These factors will be considered by every validator when contemplating if the staking rewards are “worth it”.
Calculating the monetary reward is certainly the most important input when making the decision whether to stake or not, but ‘how’ to stake is up to the user’s preferences, we already listed all those factors in Table 1, these are: liquidity (the amount of capital that is locked up), technical skills and time required for setup and maintenance.
In the following list, we suggest a staking solution that is based on what the user cares most about:
- Profit. If profit is the priority, we recommend using the Contabo VPS; for as little as $5 a month you can run a validator, it comes at the cost of trustworthiness and switching from your favorite VPS provider that you are used to.
- Peace of Mind. If users are not very technical and would rather trade part of the profits for the time and effort saved from setting up and maintaining a validator, then we recommend a validator-as-a-service provider like Bison Trails or Codefi Staking. We prefer these to Exchanges because they are more transparent and have lower fees.
- Liquidity. LiquidStake has a very nice offering, although no tokens are rewarded as in staking pools, it allows to take out up to 50% of the staked amount in USDC, meaning that you could ‘yield farm’, e.g. re-invest it, spend it, use that loan to get another loan, etc.
- Decentralization. This last option is for those who want to run their own node at home, either by buying new hardware or re-purposing old one, for practical purposes we recommend using a NUC or MiniPC. The only downside is that it will cost electricity and will require more careful monitoring for up-time. We prefer custom hardware to Avado pre-configured hardware as the former is more customizable and you can always re-purpose the MiniPC should you quit staking.
A very important factor in determining if staking ETH is worth it is comparing the net reward versus competition.
- Decentralized Finance. Decentralized finance applications such as Compound Finance, Dharma and Maker. These applications offer ways for users to lock up ETH and gain a reward. Trying to understand what these offerings are or will be is something that should be considered, we recommend reading our previous article where Extropy presents the main DeFi investment strategies.
- Other Investment Vehicles. More traditional investment alternatives such as bonds, certificates of deposit, savings account, etc. can be considered competition to staking as well. While not as directly influential to the decent as DeFi apps, they need to be considered
Eth2 Launch Pad
Ethereum 2.0 Primers
- The Beacon Chain Ethereum 2.0 explainer you need to read first
- The Beacon Chain — Ethereum.org
- Ethereum 2.0 Knowledge Base
- Research Report: Is Proof of Stake better than Proof of Work?
- Why Proof of Stake — Vitalik.ca
- Ethereum 2.0 Client Architecture
- Ethereum 1.0 to 2.0 Migration
- Proof of Stake
- Ethereum 2.0 Economics
- Youtube — Intro to Eth2 & Staking for Beginners
- Casper FFG Explainer
- Ethereum 2.0 Specifications
Hardware Requirements for Validators
- What hardware for an Ethereum 2.0 validator ?
- A slightly updated look at hardware for staking.
- A comprehensive look at hardware for staking
“Running a Validator” Tutorials
- How to become a validator on Eth2
- How to stake on ETH2 Mainnet with Lighthouse on Ubuntu
- Setup an Eth2 Mainnet Validator System on Ubuntu
- Guide to Staking on Ethereum 2.0 (Ubuntu/Lighthouse)
- Guide to Staking on Ethereum 2.0 (Ubuntu/Teku)
- Guide to Staking on Ethereum 2.0 (Ubuntu/Nimbus)
- Guide to Staking on Ethereum 2.0 (Ubuntu/Prysm)
- Eth2 Docker
Rewards and Penalties
- Rewards and Penalties on Ethereum 2.0
- Risks and Rewards of Becoming an Eth2 Validator
- 8 Things Every Eth2 Validator Should Know Before Staking