Here's Why So Many Coinbase Customers Are Staking Ethereum

Staking Ethereum is not the same as other cryptos.

Coinbase's latest results highlighted a growing trend in crypto investing: More and more investors want to earn passive income from their crypto assets. There are several ways to do this, and each carries a different level of risk and reward. One common method is staking, and Coinbase says this is an area where it expects to see a lot of growth.

In its Q4 earnings report, Coinbase said Ethereum (ETH) comprises the majority of its staked assets. CFO Alesia Haas told analysts on the company's earnings call, "We drove more than $200 million of blockchain rewards this year, which is really rooted largely in our staking revenues as we added a number of proof-of-stake assets, notably ETH2, in mid 2021."

Read on to find out how staking works and why staking Ethereum is so popular.

What is staking?

Staking is a way investors can earn rewards by contributing to the overall security of that blockchain. Certain types of cryptocurrencies use a proof-of-stake model to validate new transactions. Without getting too technical, it's much less energy intensive than the older proof-of-work model used by Bitcoin (BTC).

The only way to participate in mining and validating transactions on a proof-of-stake blockchain is to own some of those coins. Buy-and-hold investors can commit their coins to the staking process and earn rewards. Many cryptocurrency exchanges offer investors a way to stake their coins. Some people opt to stake through decentralized platforms or directly on a specific blockchain. This requires a little more work and technical knowledge, but can pay higher rates.

READ MORE: What Is Staking in Crypto?

Why stake Ethereum?

Ethereum is the world's second biggest cryptocurrency and is a popular long-term crypto investment. Right now it uses the same proof-of-work model as grandaddy Bitcoin. But it's moving to a proof-of-stake model and currently runs both systems in parallel to ensure a smooth transition.

The big difference between staking ETH and other cryptos is that you have to commit your coins for a longer period of time. Since the new proof-of-stake system isn't yet operational, staking ETH is a one-way street. When you stake Ethereum, you're tying your coins up until the upgrade is complete, which could be 2023 or beyond.

When you stake other cryptos, you might have to commit your coins for a month, sometimes more. But with Ethereum staking, you might not be able to access your assets for over a year. Some cryptocurrency exchanges may let you sell your staked ETH tokens, but it's best to assume you're committing them for the long haul.

Once the upgrade is complete, each staked ETH token will be worth one normal ETH token. The big downside is that a year is a long time in crypto. Ethereum could lose market dominance in the time it takes to complete its upgrade. It may experience technical or security issues along the way. There's a chance its price could fall considerably.

The benefit is that you can earn around 5% or more on your staked coins. Plus, you're helping the transition to a new, faster, more sustainable Ethereum blockchain. If you were planning to hold ETH and wait out any price drops, you may be comfortable with committing your coins. Personally, I have about 70% of my ETH holdings staked.

Bottom line

Staking Ethereum may offer long-term investors a good way to earn rewards. However, like anything in the crypto world, there are risks, which include price volatility and technical issues. It's important to weigh your financial situation, investment goals, and risk tolerance before tying up any crypto assets for an indefinite amount of time.