The increased levels of energy consumption due to the proof-of-work (PoW) consensus mechanism used by cryptocurrencies such as Bitcoin led developers to find a more energy-efficient way to power blockchain projects. As a result, developers created the proof-of-stake (PoS) consensus mechanism, leading to crypto staking.
At the core, staking means setting aside a specific amount of crypto tokens that will be used to verify and record transactions on the blockchain. It does not require computers that consume heavy amounts of electricity to solve intricate maths puzzles. When you stake your cryptocurrency, you own a “stake” in the blockchain network and for adding a block on the network, you will be rewarded accordingly.
Ethereum has recognized the pain points of its PoW protocol and has started a multi-phased upgrade to the PoS protocol. The Ethereum 2.0 upgrade will make the network secure, scalable, and stakable. However, staking Ethereum needs a reliable staking platform and Coinbase tops the list of dependable and genuine staking platforms. This guide will talk about Coinbase Ethereum staking, but first, let’s understand why Ethereum is making a change.
Why is Ethereum Changing Its Protocol?
The success of DeFi projects has pulled many investors to projects such as Ethereum. Due to this, the Ethereum blockchain is overburdened with network congestion, which leads to high gas fees for every transaction.
To address this problem, the Ethereum Foundation decided to upgrade the network to alleviate bottlenecks, process more transactions without raising the gas fees, and accommodate more use cases.
According to the upgrade, Ethereum will replace its mining model with the staking model. As of now, Ethereum can handle up to 15 transactions per second, but with this upgrade, the network will be able to process 100,000 transactions per second. This will considerably expand the breadth of projects that can be built on the Ethereum network.
On top of that, it is expected to reduce the energy consumption of the network and increase its security. The implementation of Ethereum 2.0 is a multi-stage process and is expected to bring significant improvements to the Ethereum network, making it more attractive for decentralized applications and enabling it to handle a larger volume of transactions.
How Does Ethereum Staking Work?
Ethereum 2.0 groups 32 blocks of transactions (also known as epochs) during the validation process. This process can last up to 6.4 minutes on the network. After adding two epochs, the first epoch becomes irreversible.
The beacon chain, which is a ledger of accounts that conducts and coordinates the network of stakers does most of the legwork. It groups 128 stakers into a ‘committee’ and assigns them blocks to validate. Once a committee receives a block to verify, 1 member is chosen to propose a new block of transaction. The rest of the 127 members have to take a vote to propose and attest to the transactions.
The Beacon chain also manages the shards, which is a process of dividing the Ethereum network into many parts. The sharding of the Ethereum network makes it faster and more scalable. Every shard has its own state and with shards, Ethereum can process more transactions per second.
After a block is verified and finalized, it is added to the Ethereum blockchain. Once it is finalized, it cannot be changed, altered, or deleted. The block can be verified if two-thirds of the validators agree on the transactions.
How to Stake Ethereum?
Staking Ethereum can be done in more than one way. One of the ways is custodial staking systems that handle the complete staking process for you. All you have to do is deposit your Ether and they will set up, run, and manage a node on your behalf.
As we’ve previously mentioned, you can stake Ethereum on Coinbase. This crypto exchange makes Ethereum staking easy with no minimum investment. But, before staking Ethereum on Coinbase, you have to follow certain steps mentioned below:
Coinbase Ethereum Staking
As with other crypto exchanges, the first step to start using the exchange is to create an account and finish the KYC process.
Create a Coinbase Account
First, you have to create a Coinbase account from your Coinbase mobile app. It is an easy process as you have to provide some basic information such as your name, email address, and location, and choose a strong password.
After that, you have to verify your identity for taxation purposes. The KYC process will require you to provide information such as your social security number, your date of birth, and a government-issued ID. After your account is verified, you can start trading and staking Ethereum on Coinbase.
Purchase Ethereum Tokens
For Coinbase Ethereum staking, you need to buy Ether tokens. The Coinbase platform lets you purchase Ether tokens directly, which makes the token buying and staking process simple as it is all in one spot.
You can buy ETH the same as stocks: as a market or limit order. Make orders allow you to buy ETH at market prices, whereas limit orders let you set a price of ETH and as soon as ETH touches that price, your order is automatically executed.
Join the Waitlist
As Ethereum is still on its way to the upgrade, you won’t be able to stake your coin right away, unfortunately. Coinbase Ethereum staking might take some time, but Coinbase has fashioned a waitlist to put you in a queue to stake your ETH as it is in huge demand. The waiting period may vary, but if you sign up early, the chances are the sooner you can stake and earn interest on your tokens.
Stake your ETH tokens
Since the crypto exchange manages the validator nodes, you simply have to stake your tokens and the exchange will take care of the rest. After this, you can watch your tokens make you money without doing anything.
Since we’ve covered Coinbase staking on Ethereum, let’s check out the rewards.
What Are the Rewards of Coinbase Ethereum Staking?
As a reward for verifying transactions and securing the network, you can get up to 5 percent APR. The rewards are calculated based on what rewards the network is paying and how much the staked tokens are validating.
When you stake a small amount of Ether, the network increases the rewards to encourage users to stake more coins. However, once a significant amount of coins are staked, the rewards are reduced.
Why Stake Ethereum?
For those still wondering, why stake this cryptocurrency, the answer is very simple. It is the world’s second-biggest cryptocurrency and a great long-term crypto investment. It is currently using both the proof-of-work and the proof-of-stake model but is making a smooth transition to PoS.
The factor that differentiates Ethereum from other cryptocurrencies is that you have to stake your coins for a long period of time or at least until the upgrade is complete, which could be 2023 or even later.
When you stake other cryptocurrencies, you have to commit for a month or more. However, when you stake Ethereum, your assets might be locked in for a year. While you can sell your tokens on some exchanges, the best option is to commit for the long haul.
The downside of committing for one year is that cryptocurrencies are volatile and Ethereum could lose its dominance over the market. It can also face security/technical issues along the way, or the prices could fall dramatically.
The benefit of staking Ethereum is that you can earn up to 5 percent APR on your coins. Also, you are contributing to blockchains’ transition to a more sustainable and faster network.
Pros and Cons of Staking Ethereum
- Passive Income: By staking Ethereum, you can earn passive income in the form of rewards for holding and participating in the network.
- Inflation Hedge: Staking Ethereum helps to counter the effects of inflation, as the rewards you receive are proportional to the amount of Ethereum you hold.
- Network Decentralization: By staking, you are helping to secure the Ethereum network, making it more decentralized and resistant to 51% attacks.
- Increased Demand for Ethereum: As more people stake Ethereum, the demand for the cryptocurrency will increase, potentially driving up its price.
- Lock-up Period: When you stake Ethereum, you typically have to lock up your coins for a set period of time, reducing your liquidity.
- Complexity: Staking Ethereum can be complex, and requires a good understanding of the technology and how it works.
- Technical Requirements: Staking Ethereum requires a computer with a certain minimum specification, which could be a barrier for some users.
- No Guaranteed Returns: Staking Ethereum does not guarantee returns, as the rewards you receive will depend on various factors such as the overall state of the network and the level of competition for rewards.
Risks Associated With Staking ETH?
Coinbase Ethereum staking is experimental and is risky due to the unpredictability of the network. It is important to assess, comprehend, and accept the risks related to staking Ether.
One of the most important risks to be aware of is slashing where you can lose all your staked assets. Slashing is imposed on a validator at the protocol level when either the network or the validator fails. To counter this problem, Coinbase has taken steps to reduce the risk of slashing. It is important to note that slashing can be caused due to reasons out of Coinbase’s control, leading to loss of staked Ether.
The Road Ahead
Ethereum has become a successful project since its launch. Along the way, Ethereum has amassed some brilliant minds such as core protocol developers and application developers. Ethereum has meticulously planned its upgrade and has implemented this multi-phased upgrade timely.
The core team is working relentlessly until all the complexities such as migrations and rollups are taken care of. Until then, staking Ethereum on Coinbase can be seen as a long-term investment for HODLers.