25th September 2022 > > ETH liquid staking.

tl;dr

It is time to assess the opportunities of liquid staking.

Market Snap

Market Wrap

Just to reassure you all, the CCC remains fiercely apolitical.

But ever the contrarian, I view the market’s obvious groupthink reaction to the simplification of the UK tax code (*), and the accompanying liberation of supply side restrictions, as a huge opportunity, from a financial perspective.

IG has GBP/USD at 1.084 right now. Let us keep an eye on it over the next few months.

Curious Cryptos’ Commentary – Liquid staking for ETH

Now that ETH has transitioned (so very twenty-first century) from Proof-of-Work (PoW) to Proof-of-Stake (PoS), the opportunities for earning passive income on your ETH holding should be first and foremost in your mind.

To be fair, these opportunities have existed prior to The Merge, but now is the right time to reassess the various options.

As background, owners of PoS coins can “stake” those coins to help secure the network, and to increase the decentralisation of that network. As a reward for staking, transaction fees from each block are awarded to stakers in proportion of their staked holding. This is analogous to miners receiving block fees in a PoW consensus mechanism.

But there is one key difference.

One could mine BTC for example, and never own BTC, except for the 10 minutes or so between receiving a block reward and selling it for fiat.

One could own BTC and never be a miner of BTC.

One can own ETH and never stake it.

But you cannot stake ETH without owning it.

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Assuming you are the proud owner of a bag of ETH, you have several staking options, which we will look at in varying detail.

The first, and most complex, is to create your own staking node. This requires a minimum amount of 32 ETH (approximately $40k) which is probably an insurmountable barrier to most people. But the added technical complexities will beat most non-techies and there are considerable downside risks known as “slashing” which we do not need to go into here. We will assume that this option is theoretically possible, but not practically so.

The second option is to stake via a centralised exchange such as Coinbase or Binance. This is undoubtedly the easiest route technically and is suitable for ETH holders who are comfortable with holding their cryptos on a centralised exchange.

Both Coinbase and Binance work in similar ways, though Binance gives a written guarantee that stakers won’t pay validator operating expenses, nor will they suffer any slashing penalties. Clearly a marketing ploy, but one that increases your staking reward from Binance compared to Coinbase if that is important to you at the margins.

For both exchanges, there are easily identifiable routes for staking your ETH on their respective websites, and further details are easily found on their help pages. If you do have trouble, or simply want a helping hand, the entire CCC team is available to talk you through this process.

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The biggest problem with these two methods of staking is that your staked ETH is now locked up and cannot be removed until the Shanghai Upgrade which will allow for unstaking, once sharding has been implemented. This is scheduled to happen in mid-2023 but could very well be delayed. I am quietly confident that all CCC enthusiasts are long-term holders of ETH, but I do understand that an indeterminate period for being unable to sell your ETH if you so wish is a touch of a turn-off.

Incidentally, the downside of this scenario was cruelly exposed during the Terra fiasco. If I recall correctly, stakers of LUNA original (now known as LUNC, Luna Classic) could not withdraw funds for two weeks, leaving them impotent in the face of a meltdown in the price of their coin.

Some other staking models work in a similar fashion.

The Cosmos network – in which the CCC has a decent sized investment – has a 21-day unstaking period, a restriction post Terra fiasco that is going to lead me to an exit from those investments earlier than originally envisioned.

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All these problems are of course easily resolved by decentralised finance (DeFi) proving once again that DeFi is destined to be one of the most enabling inventions of mankind. Solving the illiquid staking conundrum is just the start.

There are several different offerings, but we will look at Lido Finance, who apparently are now in possession of 30% of all staked ETH. That stat certainly raises some questions about decentralisation, though Lido itself is a DAO (decentralised autonomous organisation).

That stat also gives us some reassurance about Lido Finance with regards to the probability of code vulnerabilities and the possibility of rug-pulls – neither risk should ever be underestimated when interacting with DeFi.

Anyway, here you go:

https://lido.fi/#networks

Click on Stake Ether, and you will be taken to a screen very familiar to users of DeFi:

If that is not you, and you are confused by DeFi, do not despair. The training team at CCC towers are developing course modules for DeFi interaction as I write. The one specific to staking ETH on Lido will be available very soon.

Connect your wallet (probably MetaMask hopefully secured using a Ledger Nano X), stake your ETH, approve the transaction, and gas fees, and away you go.

Your ETH is now staked.

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But wait, what? How do I get it back before the Shanghai Upgrade?

In your wallet you now own 1:1 equivalent of stETH (staked ETH) but no ETH.

This stETH confers a 1:1 claim on ETH post Shanghai, it increases in total every day to give a 5% APR, but most importantly it is liquid.

By that I mean you can use stETH in DeFi liquidity pools to further enhance your passive income.

You can exchange stETH for other cryptos, or fiat, on decentralised exchanges (DEX) or centralised exchanges (CEX).

You can use it to buy NFTs.

You can use it in the same way as you use ETH, but if you are simply an ETH holder, you are now earning a small passive income, with full exit liquidity if you so desire.

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(*) HMRC has more employees than the NHS has GPs. Wrong on every level.