Ethereum has shifted from a Proof-of-Work network to Proof-of-Stake. In today’s article, we dive into the different ways to use your Ethereum after the merge.
The long-awaited Ethereum merge finally happened. After years of preparation, Ethereum developers were able to pull off the unthinkable. Ethereum has shifted from a Proof-of-Work network to Proof-of-Stake. In today’s article, CoinMarketCap Academy dives into the different ways to use your Ethereum after the merge.
To explain it in the simplest terms, the merge took place when Ethereum developers joined the original (mainnet) execution layer of Ethereum with its new Proof-of-Stake consensus layer, the Beacon Chain. After the merge, the Ethereum chain no longer needs miners to secure the chain: it uses staked Ethereum instead. This upgrade is a significant step forward in realizing more scalability, security and sustainability. The merge reduced Ethereum’s energy consumption by 99%.
The upgrade has also allowed for new ways of using your ETH, and ways of generating income with ETH that would otherwise idly sit in a wallet. These ways all revolve around staking; a process where tokens are used to validate transactions in return for rewards or yield. There are many ways of staking Ethereum. Let’s dive into these ways of staking, and their pros and cons!
Easy Ways to Use Your ETH After the Merge
The easiest way to put your Ethereum to work is by staking it on a centralized exchange. Most major crypto exchanges offer Ethereum staking in one way or another, starting with as little as 0.01 ETH. This approach is perfect for novice investors that do not know their way around the blockchain, or investors that feel more comfortable leaving their tokens in the hands of a centralized entity.
The process of staking on an exchange is usually quite easy; you’ll be able to stake ETH mere seconds after purchasing it. However, as is usual on a centralized platform, you do not own your keys. This puts your tokens at risk of exchange hacks, government action or exit scams. Consider this when using centralized platforms: not your keys, not your coins!
The return on CEX-staked Ethereum varies, ranging from 3 to 5 percent APY.
Advanced Ways to Use Your ETH After the Merge
Developers and other tech savvy Ethereum fans will tell you that running your own node is the only true way of staking your Ethereum. By running your own node, you will become one of the validators on the blockchain, contributing to the decentralization and network health of Ethereum.
To become one of these validators, you will need to invest quite heavily. First, the node requires 32 Ethereum to operate. This Ethereum cannot be withdrawn until the Shanghai upgrade, which is only scheduled for 2023.
Moreover, the node will require a beefy hardware setup. Being a validator involves storing blockchain data and processing transactions on the blockchain 24 hours a day, so you will need a powerful computer and reliable internet connection. Do not try to run a node with a wonky setup, as you will get punished or even ejected from the network if the setup fails. For many, the investment in running a single node can outweigh the benefits of it.
On the positive side, running a node allows you to keep full control of your private keys and coins. It boosts the decentralization of the blockchain as well, as the only one who controls the node is you.
Intermediate Ways to Use Your ETH After the Merge
Okay, perhaps self-hosting a full node is a bit too much. Luckily, there are plenty of options in between CEX-staking and operating a full node.
For starters, you can outsource the technical part of running a node to companies like Blox, Stakewise Solo and Allnode. You still need 32 ETH to run the node, but operating it is handled by the third party. In exchange for your validator keys and monthly fees for node operation, you will not have to worry about any hardware setup and maintenance.
This method of running a node still results in a long lock-up of your funds. As we discussed, withdrawing your ETH from staking will not be possible until 2023 (which is still a prediction). Staking, as it stands, is a one-way street. At least, if you want to run a full node.
Liquid staking solutions allow you to stake your ETH without being stuck in the protocol until the Shanghai upgrade rolls out. Liquid staking services such as Lido or Rocket Pool give you a “staked ETH” token in return for the Ethereum you put up for staking. This token can be traded for regular ETH, used as collateral or even sold for fiat, while the real ETH continues to return staking income.
On top of the flexibility, most liquid staking solutions offer another benefit: staking pools. These pools make it so that you do not have to put up the full 32 Ethereum needed to run a validator. The protocol will combine your stake with the stake of others until a full node can be made.
The advantage of this is obvious: you can start staking with any amount of Ethereum you feel comfortable with, while still enjoying the benefits of running a validator. Rather than having to put up close to $42,000 (at time of writing), you can use as little or as much ETH as you want.
On top of this, the stake is usually non-custodial, meaning that you get to keep control of your private keys. Finally, as with third-party full nodes, the staking protocol will take care of all the hardware setup and maintenance for you, in exchange for a fee.
Closing Thoughts
There are many ways of putting your Ethereum to work, whether on centralized exchanges, decentralized platforms, or by doing it all on your own.
Although these platforms have strong track records, and handle your staked Ethereum with care, it is important to be mindful of third-party risk. Since validator keys are handed over to the third party, there is a non-zero possibility of being hacked, or becoming a target of malicious actions.
Take your time to do your research when you consider staking. In particular, the decision to enter non-liquid versions of staking should not be taken lightly, as you cannot undo this decision until later next year at the earliest.
Whatever you decide to do with your Ethereum, we wish you the best yields!
Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form. Please do your own research.
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