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12/18 09:25

Exchange-Based Staking: The Pros and Cons

Bitcoin for Beginners :
Episode 47 :
Cryptocurrency Guide :

Pros :

Hands-Off Approach :
You don’t have to take care of the commitment of running and maintaining an Ethereum 2.0 node for years. Many things can happen in three years.

Some exchanges might allow you to withdraw your stake after a fixed period or even allow flexible staking. This functionality depends on the popularity of the feature.

You Don’t Need 32 ETH :

An obvious benefit is that you can participate in the process without committing the entire 32 ETH required to become a validator. This allows users with smaller investments to earn passively on their ETH without any further commitments.

You’re also not going to be concerned with any technicalities because everything you would need to do on most exchanges is stake your ETH without any further actions.

Cons :

Limited Control :

You don’t have any control over how the exchange maintains the validator node(s). Anyone can make mistakes, even an exchange. It’s impossible to revert a slashing event. So, when an exchange-based node gets slashed, all exchange-based stakers are hurt.

However, the slashing event will likely be less harsh as the exchange can spread the slash over all of its pooled stakers. Perhaps, they can tap into a reserve pool to cover the loss.

The Risk of a Halt :

Additionally, an inherent risk of keeping your funds locked in an exchange is that of a potential hack or an attack by regulators, for example. If something happens to that exchange, your funds are also at risk.

Potential Fees:

Some exchanges charge fees to maintain a validator node.

You may wonder why? Exchanges charge fees to cover their costs to maintain nodes. This added cost can remove some of your earnings from staking. Always check the details when picking an exchange.

Yet, most exchanges choose to distribute the full earnings to their users. Binance distributes 100% of on-chain staking income among its users. Kraken Eth2.0 staking, however, doesn’t mention any costs.

You can take a look at some of the most popular exchanges that support Ethereum 2.0 in our list here. Now, let’s have a look at the pros and cons of running a validator node on your own.

Running a Validator Node:

Pros and Cons :

While it might be more interesting to run your validator node to collect passive income from validating transactions, the risks are measurably higher.

Pros
Let’s also take a look at the pros.

More control over your funds :

You use your Ethereum wallet to stake the 32 ETH. In other words, the common phrase “Your wallet, your keys” applies here. When using an exchange-based staking pool, the exchange will still send your ETH to the Depositor contract that handles staking. It means that the exchange doesn’t hold the ETH in their wallets, as explained above.
  
Earning full rewards
You earn the full rewards for your stake while running a validator node. Remember that you’ll have to spend some of your funds on maintenance, such as covering cloud costs when running a node with a cloud provider.

Cons
Here are the disadvantages of running your validator node.

Not everyone has the required capital of 32 ETH.

Technical Understanding is Necessary
Some technical know-how is required to run but also maintain a validator node. If done incorrectly, such as failing to validate transactions or going offline, you can lose part of your stake. This event is called slashing, a well-known concept among the Cosmos and Polkadot community. This mechanism incentivizes validators to act honestly and maintain their nodes correctly.

Indefinite Lockup Period
Your staked Ether will be locked up for an indefinite period. It’s not possible to use this locked ETH in any of the existing DeFi protocols. The sole purpose of your stake is to secure the Ethereum Network.

Here, it’s important to note that your ETH will also be locked indefinitely if you choose to use an exchange to stake. However, most exchanges mint a synthetic token in a 1:1 peg with the ETH you stake. This token is then listed for trading. You will be receiving your rewards based on the number of synthetic tokens you own, but if you decide that you don’t want to go on with staking, you can sell it and use the capital for something else.

Conclusion: Which Option is Best?
As with many areas of cryptocurrency, a core decision is whether to give up your control over assets. In the end, exchange-based staking still sends your funds to the Depositor contract. However, you put your trust with an exchange to maintain a validator node correctly.

Remember that both staking options are subject to Ethereum’s volatility. It’s impossible to withdraw funds if Ethereum’s price experiences extreme volatility. Therefore, it’s a big commitment to stake with the Ethereum Network.

However, the underlying goal is fascinating. With the right amount of stakers, Ethereum 2.0 has the potential to reach 100,000 transactions per second. And you can become part of the network to realize this ambitious goal of becoming a “world computer.”

Yet, Ethereum 2.0 staking offers better rates than centralized finance. On top of that, if you choose the exchange-based staking option, you will also get a synthetic asset. This opens up new ways to experiment with DeFi.

In short, if you don’t have the technical know-how or don’t have 32 ETH to commit long-term, it’s probably better to opt for an exchange-based staking option. 

#ETH2.0's Beneficiary Currency

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