1. What is Ethereum Staking?

Many are familiar with 'staking' - where you deposit tokens and gain a reward for locking your token up. But why are they paying you? It is essential to understand the source of yield.

Some apps pay you to lock up your tokens as that reduces selling pressure (e.g., 'stake' $CAKE for more $CAKE). In proof-of-stake networks, validators provide a stake of tokens as collateral while providing a service to the network. They are paid when they do their job well and penalized when they don't. Other networks allow you to delegate and entrust your tokens to a node operator to earn yield.

In Ethereum proof-of-stake, staking has the following properties:

• Validators can be created per 32 ETH
• They are paid ETH rewards for proposing and validating blocks
• They can be penalized (slashed) if they attempt to be malicious
• Designed to encourage a diverse set of stakers
  • The goal is to reduce centralization risks
  • Low hardware requirements (it can run off a Raspberry Pi)
  • Low penalty for being offline => If you are down for a day, you only need to stay online for another day to break-even on the penalty
  • Penalty grows with # of impacted validators - discourages people from running too many validators with the same configuration/client software

Even with the low barriers to entry on the infrastructure end, some users are still excluded because of various reasons:

1. They don’t have 32 ether
2. They don’t want to run a machine for various reasons
3. They don’t want to lock up capital
   1. It is impossible to withdraw staked ETH from the Ethereum protocol today. Withdrawals will only be enabled ~6 months after the Merge (transition to proof-of-stake).

The demand for this is enormous - Cardano, for example, has over 70% of its supply delegated because barriers to extra yield are low. As of writing, only about 11.5% (14m out of 120m) of ETH are staked.

2. What are Liquid Staking Derivatives (LSDs)?

Enter LSDs. Numerous entities have risen to the occasion to simulate the 'delegated proof-of-stake' user experience. You give them ether; they stake it on your behalf, charge a commission on the rewards, and give you an IOU token (the LSD). Centralized Exchanges (Kraken with ETH2.0, Binance with BETH) and staking pools do it. You don't even need 32 ETH to start. Users are spared from running a validator and have some access to capital. Pool operators make money, and everyone's happy.

Most LSDs (ERC20 tokens) are accepted for use in DeFi. For example, Lido's stETH is accepted as collateral in Maker, Aave, and Alchemix. Rocket Pool's rETH proposals for Maker and Aave are in flight and should be implemented shortly, and it is already live on Alchemix. As such, LSDs offer users more flexibility and capital efficiency than solo-staking.

3. What are my options?

A breakdown of risks is shown on ethereum.org/staking/pools.