Ethereum Staking – Solo staking vs SaaS vs Centralized Exchange vs Liquid staking
We compare the different approaches to Ethereum staking.
Ethereum staking is a process that enables network participants to earn rewards for contributing to network consensus.
You can obtain Ether (ETH) tokens and lock them up via a smart contract to validate transactions and secure the network, a process known as proof of stake (PoS).
Approaches to staking ETH can be broadly categorized into four primary groups, including solo staking, staking-as-a-service providers, staking on a centralized exchange, and using a liquid staking protocol.
Solo staking is the only Ethereum protocol-native way to stake ETH, requiring an individual to manage all aspects of staking and participating in network consensus directly.
This includes running a full Ethereum node, depositing 32 ETH to activate a validator client, selecting the client implementations for the execution and consensus layers, and maintaining constant internet connectivity and sufficient bandwidth.
Although solo staking generally provides the highest returns, it requires technical knowledge and can result in lower returns if the staker fails to keep the validator online and performant.
Staking-as-a-service (SaaS) providers such as Allnodes, Kiln and BloxStaking assume the operational complexities of managing a validator.
SaaS providers charge a monthly fee or management fee that is generally a percentage of the staking returns generated. ETH stakers can leverage SaaS providers on a non-custodial basis, allowing them to maintain control over their private keys.
However, there are embedded trust assumptions that the SaaS provider will maximize rewards and avoid penalties and slashings. SaaS options may have additional code wrapping the Ethereum clients that is not open or auditable.
Many centralized exchanges (CEXes) such as Coinbase, Binance and OKEx also provide staking services similar to SaaS providers.
Centralized exchanges pool together client assets and manage validators on behalf of the pooled ETH in aggregate, allowing users to stake ETH without any account minimums in most cases.
The ETH staked on a centralized exchange are held in the exchange’s wallet, so this staking method is custodial as the exchange holds the private keys. Whether this is a good or bad thing depends on your ethos for self-custody and whether you can trust the exchange that you're staking with.
Liquid staking applications like Lido, Rocket Pool, Frax and StakeWise enable users to earn staking rewards with improved liquidity compared to previously covered offerings while still outsourcing the burdensome node management responsibilities.
Liquid staking solutions leverage smart contracts on Ethereum to create liquid, tokenized (wrapped) representations of the ETH staked on the Ethereum network.
These tokenized staking deposits are frequently referred to as liquid staking derivatives (LSDs), and they represent a tokenized claim on staked ETH. However, liquid staking solutions are still relatively new, and there are potential risks and challenges involved including smart contract risks.
Here's a table to summarize the above:
|Solo Staking||Requires an individual to manage all aspects of staking ETH and participating in network consensus directly. Solo stakers must run a full Ethereum node, select client implementations, monitor communication channels, maintain constant internet connectivity and private key management.|
|Staking-as-a-Service (SaaS)||SaaS providers manage a validator on behalf of high-net-worth individuals or institutional clients, charging a management fee. ETH stakers can maintain custody of their assets, but there are trust assumptions that the SaaS provider will maximize rewards and avoid penalties.|
|Centralized Exchange Staking||Exchanges pool together client assets and manage validators on behalf of the pooled ETH. Assets staked on an exchange are held in the exchange's wallet and the staking method is custodial.|
|Liquid Staking||Leverages smart contracts on Ethereum to create liquid, tokenized (wrapped) representations of the ETH staked on the network. Liquid staking derivatives (LSDs) allow for staking rewards with improved liquidity while still outsourcing node management responsibilities.|
CEX staking and liquid staking providers are likely to attract the majority of incremental demand for staking as they offer increased rewards at reduced complexity for stakers.
Providers prioritizing decentralization and yield leverage like Rocket Pool may also gain further traction as integrations grow and the liquidity gap between stETH and rETH decreases, although the inherent complexity of running a node may deter some.
Overall, as rewards and decreased risks incentivize staking participation, we expect the amount of ETH staked in the network to continue growing.
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