Staking: the evolution of blockchain validation

As is well-known, Bitcoin is based on so-called mining. This process, which serves to maintain the Bitcoin blockchain, requires considerable computing power and rewards participants in the form of new Bitcoins for their efforts. Other blockchains, and Ethereum in particular, function according to a different system: staking. In this article, you can find out what staking is, how it works, who can take part and what advantages it offers.

What is staking?

Staking is a mechanism within blockchain networks that is used to validate transactions and create new blocks. It is a process that sees holders of crypto assets deposit their coins with the blockchain so as to support its network. In return, they receive so-called staking rewards, which are automatically paid out to the stakers by the blockchain in the form of additional coins.

For Ethereum, staking rewards are paid out in Ether, with the current yield standing at around 3%. The amount paid out per staker is dependent on the total number of all stakers. If there are more stakers, the pie is split among more people, meaning that each staker receives a smaller reward.

The method is frequently used in so-called proof-of-stake (PoS) systems, which represent a more energy-efficient alternative to the traditional proof-of-work (PoW) mechanism. The latter requires mining, a process that entails miners drawing on cost-intensive computing power to validate transactions in an honest manner and create new blocks. Staking, by contrast, involves depositing a “stake” in the form of the network's own coins, with this capital serving as a guarantee that stakers will work carefully. In the event of mistakes or intentional misconduct, it is possible to lose your stake.

With Ethereum, stakers have two main tasks: they propose new blocks with transactions and validate the blocks of other stakers. In return, they receive staking rewards for both of these tasks. However, if they fail to perform their duties properly, they can be “slashed” and lose their staking deposit either in part or in full.

Note on the graphic: Staking process at Maerki Baumann - https://www.archip.ch/en/archip-private/custody-and-trading.

How staking works

The staking process sees a user’s coins blocked for a certain period of time. The coins remain blocked until the user decides to stop staking, whereupon the blockchain releases the coins once more.

The likelihood of being selected as a staker to validate the next block and receive the staking rewards is mostly down to chance. Nevertheless, the more coins a staker holds, the higher their chance of being selected. Generally speaking, proof-of-stake algorithms reward participants in proportion to their stake.

In the case of Ethereum, a maximum of eight new stakers can currently be added every 6.4 minutes, while 15 stakers can leave. Due to a queue, it currently takes more than 11 hours to become an Ethereum staker. And it takes even longer to get out. Entry and exit times are set dynamically by the protocol. The probability of being selected as a staker for block production in Ethereum is random and equally distributed according to the number of active validators in the network.

Participating in staking

In principle, anyone who owns a crypto asset on a public blockchain can take part in staking. In most cases, however, certain conditions apply:

• Minimum balance: some networks require participants to have a minimum balance in order to be able to stake.
• Compatible wallet: a wallet that supports staking is required.
• Technical requirements: to act as a validator, you need a permanently active Internet connection and corresponding hardware (this is referred to as a full node in technical jargon).

Alternatively, it is also possible to participate via staking pools or crypto exchanges that offer staking services. The first banks are now also offering the opportunity to stake via a secure and regulated infrastructure. If you are interested in the staking of Ethereum coins, please do not hesitate to get in touch with your contact at Maerki Baumann. Generally speaking, working with a trustworthy third party makes it easier to get started with staking.

With Ethereum, stakers can currently deposit 32 ETH per validator - no more and no less. According to the current Ether price, stakers therefore need to raise well in excess of USD 100,000. With the upcoming Pectra update in the first quarter of 2025, stakers will be able to deposit between 32 and a maximum of 2,048 ETH. 

Advantages of staking

💰 Return: staking yields a return in the form of regular rewards. This return is paid out in the blockchain’s own coin.

📈 Increase or decrease in value: the rewards, which are paid out in the form of additional coins, can increase (or fall) in value, leading to potential gains (or losses).

🌱 Low energy consumption: compared to PoW systems, PoS requires less energy, meaning it represents a more environmentally friendly alternative.

Important legal information

^{This publication is intended for information and marketing purposes only, and does not constitute investment advice or a specific individual investment recommendation. It is not a sales prospectus and does not constitute a request, an offer, or a recommendation to buy or sell investment instruments or investment services, or to engage in any other transaction. Maerki Baumann & Co. AG does not provide legal or tax advice. Investors are therefore advised to obtain independent legal or tax advice concerning the suitability of such investments, since their tax treatment depends on the personal circumstances of the investor in question and is subject to change at any time. ­Maerki Baumann & Co. AG holds a Swiss banking licence issued by the Financial Market Supervisory Authority (FINMA). This publication is expressly not intended for persons domiciled in Germany or so-called U.S. persons.}

Editorial deadline: 17 July 2024

Maerki Baumann & Co. AG
Dreikönigstrasse 6, CH-8002 Zurich
T +41 44 286 25 25, info@maerki-baumann.ch
www.maerki-baumann.ch