This article is compiled based on the presentation by imToken Product Manager Yuan at ETHKL.
Ethereum's transition to proof-of-stake has allowed ETH holders to participate in securing the network by staking their coins. In return, stakers earn attractive rewards in the form of newly minted ETH. The average APY is about 4.51% and the medium APY is roughly 3.57%.
At first glance, the APY for Ethereum staking does not seem particularly high. However, this system is quickly gaining adoption, with over 27 million ETH worth $4.2 billion now staked. That represents 22.91% of the total ETH supply.
So why do so many people choose to stake their ETH? To understand the appeal of staking, we first need to take a step back and examine what Ethereum staking actually involves.
What is Ethereum Staking?
Ethereum staking involves depositing ETH into smart contracts to become a validator on the network. As validators, users are responsible for:
- Storing network data
- Validating transactions
- Proposing and verifying new blocks
In essence, validators provide critical infrastructure to keep Ethereum secure and add new blocks to the blockchain.
In return for providing these services, the Ethereum protocol rewards validators by issuing new ETH as incentives. Validators can earn greater rewards for staking more ETH, aligning their interests with securing the network.
Validator rewards originate from two main sources:
- Staking Rewards: New ETH minted by the protocol to incentivize participation. This makes up 73.4% of all rewards.
- Block Rewards: A portion of fees from transactions included in each block. Fees account for 17.7% of rewards. There's also extra revenue called MEV (Maximum Extractable Value) which validators can capture, making up the remaining 8.9% of rewards.
However, validators who act dishonestly or improperly will be slashed and lose a portion of their staked ETH as punishment.
Ethereum Staking is Data Validation, Not Investment
It's important to clarify how ETH staking differs from traditional investing. Stakers are not "investing" their ETH in hopes of earning unsustainably high returns. The rewards come from real economic activity on Ethereum in the form of fees and protocol-issued incentives.
Stakers are providing valuable services and getting paid for it. They help decentralize the network and share in the upside as Ethereum grows. It is a sustainable system that discourages manipulation and properly incentivizes good behavior from validators.
Global Distribution of Validators
As of 2023, there are over 860,000 validator nodes on Ethereum which have staked ETH and are participating in block production and transaction validation. This provides a high level of decentralization.
Importantly, these validators are distributed across many different countries rather than concentrated in one region. The United States accounts for around 34% of validators, the most of any single country. And Germany follows with roughly 13% of the validator base. Other major participants include the UK, France and Canada each account for 3-6% of validators.
This worldwide distribution helps make Ethereum highly decentralized and censorship-resistant. If validators were concentrated primarily in a single country or region, it would raise concerns over centralization and aligned interests. But with validators dispersed globally, no single entity can control the network. All participants have incentives aligned around securing Ethereum and supporting its continued growth and adoption.
Evaluating the Different Staking Options
There are several ways ETH holders can get involved in staking:
- Solo Staking: Running your own validator node requires 32 ETH and high technical competence. The most secure and permissionless option but lacks liquidity.
- Staking Services: Also need 32 ETH. A provider maintains infrastructure and operations for you. Non-custodial so you retain ownership.
- Pooled Staking: Requires small amounts like 0.01 ETH. Providers aggregate funds from many users. Easy to use but introduces counterparty risk.
- Centralized Exchanges: Can stake any amount but relinquish control of assets. Highest trust requirements.
Each approach involves tradeoffs around factors like minimums, liquidity, trust, and technical needs. For many, pooled staking strikes the right balance by enabling easy access for smaller amounts while maintaining wallet custody.
Related reading: The Pros and Cons of Different ETH Staking Solutions
Why So Much ETH is Staked
The sheer amount of ETH migrating to staking, representing over 20% of total supply, demonstrates the appeal of this system. There are several driving factors:
- Attractive Rewards: While the APY around 4-5% doesn't seem very high but is still an enticing yield in the current macro environment. This provides a steady stream of income for long-term holders.
- Convenient Participation: Options like pooled staking open up staking to smaller holders and make the process easy.
- Secure the Network: Stakers help decentralize Ethereum and secure its future. Many are eager to actively support the ecosystem.
- Long-term Potential: Staking ETH now builds your position for the long run as Ethereum scales and adoption grows.
Conclusion
Ethereum staking allows ETH holders of all sizes to earn yields on their assets while helping to secure the blockchain's future. The incentives encourage participation, with over 20% of the total ETH supply already migrated to staking.
As more user-friendly options emerge, staking will become accessible to more people and strengthen Ethereum's network effects. Whether you are a whale with a large ETH balance or hold a smaller amount, you can participate in staking.
Major holders can leverage their ETH power to shape Ethereum's future through non-custodial staking services provided by imToken. At the same time, imToken also makes staking easy for smaller ETH holders through pooled staking features.
Moreover, you’ll be a supported staker because with imToken, you get staking tutorials and our customer support is on standby 24/7 in case you ever get stuck
Related readings: