Earn yield on your Ether by depositing it on an Ethereum staking platform
The Ethereum 2.0 network is secured by a consensus mechanism known as Proof-of-Stake by which stakers (a.k.a "validators") can run nodes on the network and validate transactions made by end-users. However, to become a validator, they need to deposit 32 Ether per node. This requirement ensures that validators have sufficient "skin in the game". If they behave as expected and only validate rightful transactions, they receive rewards paid out in Ether. If they don't behave as expected or cheat they can get part of their deposit taken ( a.k.a slashing ).
Something that you have to know about staking on Ethereum is that the full transition to Proof-of-Stake will take 1-2 years. While the skeleton of the Ethereum 2.0 network is launched on December 1 2020 all the normal activity (like trading, payments etc.) will still take place on Ethereum 1.0 for a while.
This means that your staking rewards will not be available until the Ethereum 2.0 network is fully functional unless you use a staking provider that allows you to sell your deposit and exit (more about this option in the next section). Think of it like an invoice that is due to you in one 1-2 years and which becomes more valuable every day.
There are different options available to stake on Ethereum. The normal process entails setting up an Ethereum node on your computer or a special hardware equipment and requires a very stable internet connection and regular maintenance. Since this process is too demanding for most average users there are specialized staking platforms that facilitate the task for users.
Custodial staking platforms take care of the entire staking process for you. You just have to deposit your Ether and they set-up the node for you. They also run and maintain the node so you don’t have to do anything. The main difference with Solo staking platforms is that you don't control the private key of the validator node. Your funds are controlled and managed by the staking provider. In exchange for their service they take a portion of your rewards.
Because they control your funds, they are also called "Custodial staking platforms". This type of staking service can be offered by crypto exchanges like Binance but often the service is offered by specialized Ethereum staking platforms like Stakewise or StakeFish.
Another characteristic of staking pools is that in most cases you will receive a deposit token. This deposit token proves that you are owed the equivalent amount in the pool and it accrues value as the funds in the pool increase by getting rewards. The deposit token also makes your staking deposit liquid. You can sell it on platforms like Uniswap and swap your deposit token back to Ether, provided there is demand for the deposit token.
Ethereum solo staking platforms set-up and manage the validator node for you in the cloud but importantly, they do not control your funds. Although you won’t have to worry about the node maintenance, you still have control over the funds because you receive the withdrawal private key. The withdrawal private key is required to withdraw or move the validator balance, once it becomes possible in later phases of the Ethereum 2.0 network. In other words, there is no way for the staking operator to steal your funds or lose your funds to a hack. That’s why they’re referred to as "non-custodial staking platforms".
With solo staking platforms the billing is usually a fixed monthly cost instead of a percentage cut. You essentially pay the staking operator for the maintenance and server costs.
Some Ethereum staking platforms offer both services so you can start with custodial staking to get a first impression of the procedure and later transition to non-custodial staking.
An Ethereum staking pool allows users to pool their funds together and collectively deposit the funds into validator nodes where they generate rewards. The nodes are typically hosted and maintained by a service provider which takes a cut for their service.
Staking pools provide two advantages: no min. deposit requirement and liquidity. When staking solo, users have to deposit 32ETH which is the network requirement to run a node. When staking in a pool they can deposit any amount. The second advantage is liquidity. The majority of Ethereum staking providers issue a deposit token which can be traded against ETH.
The rewards paid for staking are determined algorithmically by the Ethereum network. The more people stake the lower the rewards. For example, at 1m ETH staked the annual interest rate is 15.7%, at 2m ETH it's 11% and at 3m it’s 9%. You can track the amount of ETH staked on DuneAnalytics.
The amount of fees you’ll have to pay for staking on Ethereum, depends on whether you stake solo or in a pool. Pool providers generally take a percentage cut on your monthly or weekly rewards, whereas non-custodial staking providers generally charge a flat monthly fee for providing the node infrastructure and server costs.
No. Your rewards go to your Ethereum validator address but they are not compounding, i.e you are not earning interest on the rewards. If you accumulate enough rewards (32ETH) though, you can set up a new validator.
If you deposit in an Ethereum staking pool you can re-invest the rewards you receive for staking into the pool. Note, that you will have to do this manually, i.e sell the reward tokens for ETH and deposit the proceeds into the staking pool.
Again this depends on the service provider you’re using. Generally, only custodial/pooled staking providers are able to provide exit liquidity for their pool. They can do that because they have full control over the funds in the ETH 2 validator node. So when you sell your deposit token to someone else, that other person has a claim on the ETH2 balance + rewards in the future. Non-custodial staking providers are not able to issue deposit tokens because they have no control over users funds.