Why do Ethereum and other POS blockchains need investors to stake their crypto?

What’s in it for you to stake on Ethereum (ETH)? Rewards paid in ETH, is the short answer. 

Staking protocols incentivise network participants to stake their crypto and help verify transactions using a reward and penalty system. The carrot and stick method, in other words. The carrot is the rewards that validators, individuals or companies that stake crypto, can earn for staking ether (ETH), and the stick being the penalty that validators incur if they don’t follow the rules of the network. 

How often are validators penalised? 

Slashing of funds, what happens when validators are penalised, very rarely occurs as staking service providers go to great lengths to ensure their nodes run optimally. 

Are my funds safe? 

Luno has partnered with one of the most trusted staking services providers in the industry with a track record of 99.9% uptime to date. Their validator node is monitored 24/7 with backup nodes on standby. Due to these security mechanisms, slashing very rarely occurs, but in the unlikely event that your staked crypto is slashed, our staking provider has processes in place to review and remediate slashing penalties where it is commercially reasonable to do so. We’ll communicate the steps you can follow in the very unlikely event of this ever happening.

How do I stake my crypto? 

Who gets to confirm transactions on a proof of stake blockchain like Ethereum is decided by the size of the stake of each validator. Ethereum requires validators to stake at least 32 ETH. The larger a validator’s stake, the better the chances of them being chosen to confirm the next block of transactions. Whoever gets chosen puts up their stake as collateral, a type of deposit, to ensure they follow the rules and confirm valid transactions. 

This puts staking out of reach for most individual investors, but there are various staking service providers that pool investor funds and make staking accessible to the everyday crypto investor. Luno has partnered with one of the most trusted staking services providers in the industry to bring staking to our customers.

Note: Staking will initially only be available to customers in South Africa.

How does staking differ from traditional interest-bearing investments? 

Money in a traditional bank account is essentially on loan to the bank, which they then use to invest in other assets to generate more money. For borrowing your money the bank pays you interest on the amount in the account.

Staking is different. Every time a block is added to the Ethereum blockchain, a certain amount of new ETH (2 per block) is minted and distributed to the validator who confirmed the block of transactions, in what’s known as a block reward. It incentivises validators to keep validating transactions.

The amount of rewards earned from staking varies depending on the cryptocurrency being staked and the network’s reward structure. Some networks offer a fixed reward, while others offer a variable reward based on the number of tokens being staked and the amount of activity on the network.

The annual reward for staking on Ethereum has averaged around 4% on the amount of ETH staked.

*This information should not be construed as a solicitation to trade. All opinions, news, research, analysis, prices or other information is provided as general market commentary for information purposes only and is not investment advice or recommendation. Luno always advises you to obtain your own independent financial advice before investing or trading in cryptocurrency.