When Ethereum (ETH 3.09%) developers implemented The Merge, the name given to its transition from proof-of-work to proof-of-stake, they made it so that staked funds couldn't be withdrawn and were locked on the network for an indeterminable amount of time. This inability to withdraw likely dissuaded would-be holders from staking, as there was no end in sight to when they could reclaim their staked funds if needed.
But now it looks like there is an end in sight. Building off of The Merge, Ethereum developers are in the process of fine-tuning the next upgrade, known as Shanghai, which will allow users to finally withdraw funds and should be unveiled this March.
So, with light at the end of the tunnel, this begs the question: Should you stake your Ethereum?
A couple of options to consider
Before answering that question directly, let's evaluate the different ways to stake.
There are two primary ways. One is through an exchange that provides access to staking pools, and the other is known as a liquid staking protocol. Both provide users with interest rewards, but the manner in which it is done differs slightly.
Using a staking pool through an exchange is easily the most straightforward and simple. Popular exchanges like Binance or Coinbase allow users to lock up their Ethereum and earn generous rewards that are paid out every few days.
The alternative to a staking pool are liquid staking protocols. Rather than staking your funds and only earning interest, liquid staking lets you earn interest and provides an equivalent amount of the funds staked in the form of another unique token. In doing so, users get the benefit of earning rewards but also maintaining liquidity to go participate in other crypto endeavors like buying non-fungible tokens or using them for other investing options.
One of the most popular is Lido. Users who stake their Ethereum through Lido (LDO 3.52%) receive another token in exchange, stETH (STETH 2.44%). Users are compensated with an equal amount of stETH as the amount of ether they staked. The stETH tracks Ethereum's price, so there is virtually no lost value. This stETH is also the means by which rewards are paid out.
A word of caution is needed, though, as this method is slightly more technical for the average user.
The crypto version of a dividend stock
While it would have been tough to advise staking without knowing when withdrawals would be allowed, the loom of Shanghai makes staking much more alluring. While staking Ethereum isn't a get-rich-quick strategy, it can still be a valuable way to pad your portfolio and put your money to work. Rewards are paid out every few days and are proportionate to the value staked -- meaning the more you stake, the more you earn.
Currently, the annual percentage rate hovers around 4% to 5%, but this rate is set by the Ethereum network and rises and falls based on the number of validators. The fewer validators, the higher the return, which incentivizes users to join the network and stake funds. The greater the number of validators, and the APR will fall slightly.
Modest profits can be made at the current APR (4% to 5%). For investors with $1,000 worth of Ethereum, they can expect around $43 per year. At $5,000, that number grows to nearly $220. But the beauty of this method is that you can reinvest these rewards, let them compound, and reap the benefits of letting your money work for you. In addition, should Ethereum rise in price, the total value you have staked will also increase, thereby increasing your return.
You could think of staking as being similar to a stock that pays dividends. It may not be much in the short term, but consistency over the long run is where true gains can be made. Although the payout might feel minuscule in the beginning, one day it could turn into a significant source of income, especially if Ethereum continues to rise in value as it has over the past few years.
