top of page
Search

26th November 2022 > > Crypto staking part 4.

tl;dr

Getting into the guts of staking by looking at some of the options for ETH.


Market Wrap








Market Wrap

The next serious financial problem is brewing already. I know this is an arcane topic but the cost to governments as QE (quantitative easing) is wound down (notably the ECB has yet to do so) and QT (quantitative tightening) takes its place.


Central Banks worldwide have been throwing cash at their owners (aka the government) in terms of interest payments on bonds they bought with money magicked out of nowhere. QT involves selling those bonds back to the market, at a price which is now much lower than when they bought them. Governments (and CBs are simply an arm of the Government – they have never been, and never will be, independent despite claims to the contrary) are a dab hand at buying high and selling low.


We are all on the hook for the Bank of England’s balance sheet, and it isn’t going to be pretty.


Curious Cryptos’ Commentary – Crypto staking part 4 - staking ETH

Now we have looked at two distinct examples of centralised staking – neither of which appeal to me as the risks far outweigh the rewards – it is time to get stuck into the interesting stuff.


There is a plethora of decentralised staking options, many of which are commonly referred to as yield farming. But we shall start very simply, with a discussion of the process and mechanisms for staking ETH.


ETH recently transitioned from a PoW (Proof-of-Work) consensus mechanism to a PoS (Proof-of-Stake) consensus mechanism, one step on the roadmap to ETH 2.0. In many respects, participating


in PoS is really the one true definition of crypto staking.


As always, Wikipedia is a good place to start:


“Proof-of-stake (PoS) protocols are a class of consensus mechanisms for blockchains that work by selecting validators in proportion to their quantity of holdings in the associated cryptocurrency. This is done to avoid the computational cost of proof-of-work schemes.”


Validators stake their holding of the currency native to the blockchain under discussion, in this case ETH. Each validator has a probability of being chosen to validate the next block in direct proportion to the number of coins staked by that validator.


In return for validating the next block, the validator earns the fees included in that block.


Some commentators liken this to depositing fiat into your bank account and earning interest on that deposit.


These commentators are rather oversimplifying the situation, either because they cannot be bothered to do proper research, or they don’t understand the material they have researched. Neither laziness nor lack of intellect are particularly good looks.


It is feasible, but difficult, to set oneself up as an ETH validator. For a start, the minimum staking requirement is 32 ETH, so around £30k today. I suspect that is a hurdle too far for many people.


There are some technical issues too, requiring dedicated IT resources, constant monitoring, updating of software and so on. Failure to adhere to some minimum service guidelines can result in a haircut of your staked coins. The commentators previously alluded to would compare that with the theft of cash from bank accounts held at domestic banks by the Cypriot government in 2013 but the latter was simply criminal, and the former is part of the agreement willingly entered into by both sides.


But there is another way to get involved, and that is to join a staking pool.


In effect you outsource the staking process to an organisation whose sole purpose is to provide such a service. The organisation will reap the rewards from creating blocks, take a fee (typically 1% to 5%) of those proceeds, and divvy up the rest to all those staking coins through them, in proportion to the number of coins staked.


This is not without risk, but if you do your research, and you choose your validator wisely, then your staked ETH holding will earn you a predictable and constant stream of additional ETH. And we all like extra ETH, even crypto naysayers.


For many of my staking coins I use stake.fish as my intermediator:



My experience of this organisation is overwhelmingly positive. I have rarely had issues with them, and when I do need to contact them, the reply by email is forthcoming almost immediately. Problems are resolved in short shrift.


But this is just a personal view and is not to be taken as a recommendation, though perhaps we can use stake.fish as a working example.


Head on over to:



Firstly, you need to connect your wallet. I will continue to repeat this next sentence repeatedly – please use MetaMask secured by Ledger Nano, my preference is an X though some disagree in favour of the S.


Once connected, hit the “Stake Now” button, and several blocks later you are then participating in helping to secure and maintain the decentralisation of the Ethereum network.


At any point in time, you can view your ETH rewards but as always with cryptos there is a wrinkle.


ETH that has been staked either directly as a validator, or indirectly using a staking pool, or even through a centralised cryptocurrency exchange, is locked up until the Shanghai upgrade is in place, the next step in the roadmap of the ETH transition process.


Shanghai is expected to launch early 2023, but it may be delayed.


If you are holding ETH for the long-term (and next year cannot be described as long-term) this restriction should be of no bother to you.


If you think that you might want to access your ETH in the next 6-12 months, this type of staking is not for you.


However, I do have a solution to this conundrum, and one which can be used for long-term holders too. Tomorrow, or soon after, we will look in detail at liquid staking. Gosh, that will be exciting.


I do heartily suggest that if you decide to go down this route you investigate staking pools other than just stake.fish.


A good place to start is a (short) list provided by the Ethereum Foundation:


9 views0 comments

Recent Posts

See All

16th July 2024 > > Miscellany.

tl;dr Institutions have been buying cryptos courtesy of the German taxpayer. Trump’s re-election odds have moved substantially in his favour, which may or may not impact cryptos. Coinbase’s “everythin

15th July 2024 > > UK.

tl;dr UK politics as they relate to cryptos. Market Snap Market Wrap In the last six trading days over $1bn has flowed into spot BTC ETFs. We are now one month away from the next quarterly deadline fo

14th July 2024 > > The CCC is back!

tl;dr A criticism, an apology, a dig at the bureaucrats (we haven’t had one for a while), an unlikely wish, and the tantalising prospect of fully opening the doors to TradFi. Market Snap Market Wrap L

Comments


bottom of page