In the one year since its launch, the Beacon Chain has largely maintained an above 97% participation rate. Among the 250,000 validators, only 158 have been slashed. These slashing events were mostly due to operational errors or deployment mis-configurations rather than deliberate misbehaviour. The robustness of the network has proved equal to the staking growth so far.

Last month, the Beacon chain underwent its first upgrade: the Altair fork. From a validator perspective, the key element of this is that the penalties for inactivity and for slashing have now been increased from their original levels: the training wheels are coming off. This means the selection of your staking provider, or client if you are running your own node, is even more critical than it used to be.

Before we get into the nitty-gritties of why staking is a good way for institutions to earn rewards on their Ethereum holdings, let’s look at what staking is, and why it is important for Web3.

What is staking?

Staking is a mechanism that validates transactions on a blockchain. For Ethereum, it is facilitating the transition from Eth1 to Eth2 (using old-money nomenclature). Let’s dive into what this means.

Prior to staking, the way to reach consensus on the legitimacy of a transaction was through the Proof of Work (PoW) mechanism, similar to the Bitcoin blockchain. With the PoW mechanism, miners execute a certain amount of computation, or work, to create the next block. Miners then earn rewards, in the form of new tokens, based on the payment of transaction fees. However, all this computation requires heavy investment, as well as a significant amount of electricity. 

The Proof-of-Stake (PoS) mechanism emerged as an alternative to PoW in 2012. In this method, people can validate transactions on a blockchain by putting their crypto assets “at stake”. 

Staking requires a network of validators to place a security deposit of 32 ETH in special accounts on the network as a guarantee that they will follow and enforce network rules. These rules include ensuring that no fraudulent, or double transactions happen on the network. 

PoS solves one of the main criticisms of PoW: the fact that it is energy intensive, and is worsening climate change by adding massive amounts of carbon to the environment. 

Currently, 1 Ethereum transaction utilizes 178.89 kWh (kilowatt-hours). This is more than what it takes to process 100,000 VISA transactions. Per year, this accumulates to roughly 89.11 TWh (terrawatt-hours), an amount comparable to the annual energy consumption of Belgium. 

One of the reasons that PoW is an energy guzzler is that it essentially pits miners against each other. Miners compete to solve a mathematical puzzle to create the next block. The winner earns rewards for each block that they add to the blockchain. All the energy that went into the computation from other miners is wasted. 

In contrast, PoS removes this competition. In staking, an algorithm chooses from a pool of validators—each validator has staked ETH to ensure that they respond to validator duties appropriately. There is no waste of energy as the network of validators work together rather than against each other. Thus, PoS uses 99.95% less energy than PoW, according to the Ethereum Foundation. 

For individuals and organizations that hold ETH, PoS also marks a more inclusive way to maintain the security of the Ethereum network compared to PoW, along with comparatively high rewards for participants. 

Why should institutions consider Ethereum staking over other DeFi activities?

Staking is only available in Web3. It has no Web2 parallel. Most other activities in Web3, such as trading, lending, borrowing, derivatives, and asset management, are replicated from Web2. 

Staking is also a relatively stable way to earn rewards, in comparison with other DeFi activities where institutions often have to be hands-on in identifying the best investment pools for high yields. In keeping with the principle of “high risk, high rewards,” the DeFi opportunities that offer higher rewards often involve volatile environments. 

In contrast to other DeFi activities, staking Ethereum only incurs technical risks—and not market, credit, or exchange risks. For example, the Altair upgrade to the Ethereum network in late October introduced some risk for validators losing their rewards if they did not upgrade their nodes in time. 

The participation rate on the network (the proportion of validators that are voting correctly) dropped from 99.8% to 95% over the fork, but gradually climbed over the next few hours back to the usual 99%+. An Ethereum researcher, Jeff Coleman, tweeted that the validators who were offline “are slowly reducing in balance. If they don’t fix it they will cross a threshold and be ejected.” 

In summary, as long as your staking-as-a-service provider performs well (i.e. does not miss attestations and incur penalties), your institution’s staked Ether should achieve optimized and steady rewards.

Why is staking ETH lucrative to organizations?

Holding a large amount of ETH is a key factor in ensuring that crypto exchanges, funds, and custodians are able to partake in the fast-growing Ethereum decentralized finance (DeFi) ecosystem. Holding ETH is integral to participating in various DeFi applications and executing transactions.

Ethereum staking, whether through your own validator or in partnership with staking providers, can help crypto funds and market makers generate at least 5% annually—and more after the Merge when priority fees and tips will be routed to validators instead of miners from the PoW era. Organizations can expect these returns as long as their validator operations run smoothly.

As the Ethereum ecosystem rallies around its new PoS mechanism, more and more institutions want to earn rewards in return for maintaining network security. However, setting up staking infrastructure and maintaining validator software requires complex technology development and solid security expertise. While technical bugs, software failures, and connectivity issues can jeopardize rewards, mismanagement of keys and transaction problems can lead to a loss of principal funds. 

This is where Codefi Staking comes in.

Why you should stake ETH with Codefi.

Codefi Staking enables financial institutions, cryptocurrency exchanges, funds, custodians, and family offices to capitalize on the revenue opportunity of Ethereum without the technical and operational complexities of running an independent validator.

Codefi Staking was created by Consensys, the software engineering leader at the forefront of Ethereum blockchain development. We work closely with the product teams running Infura’s industry-leading blockchain infrastructure, and building Teku, the only institutional-grade Ethereum client. Teku consistently outperforms all other Eth2 clients, because it is the only client built to meet institutional needs and security requirements. 

With Codefi Staking, institutions can significantly reduce technical risks, increase rewards generation, leverage best-in-class validator key and transaction security, and enjoy easy and efficient validator management.

Stake ETH with Codefi