Staking on Ethereum and Cardano: Participating in decentralization

comparison article on staking on the cardano and ethereum blockchains

Consensus

In our article about blockchain consensus: Consensus on Ethereum & Cardano, we learned the difference between Proof-of-Work (PoW - like Bitcoin) and Proof-of-Stake (PoS - like Cardano and Ethereum 2.0) consensus protocols. We concluded that we are more interested in a future that features PoS blockchains that can scale to serve the whole planet, without needing to fuel an arms race between massive computing engines to do it.

Validators

Next we dialed in the lens from consensus on the whole network, to what it means to be a node operator who actually participates in consensus by validating transactions. Running a blockchain node is a job, of sorts - those who do it well get paid by the network when they mint blocks. Network fees from end-user transactions supply the capital to pay this decentralized network of node operators.

End Users

But what about those end users? Do they have a role to play in consensus?

Going back for a moment to Bitcoin or any PoW blockchain and the answer is “no.” If you hold Bitcoin, you can use it to buy a pizza or any other financial transaction where the other party accepts Bitcoin. The transaction fee from your pizza purchase will ultimately pay the node operators who processed and validated your transaction. If you hold Bitcoin because you hope to make money with it, that will only happen if the comparative value of Bitcoin goes up. (Which to be fair, historically, it has).

However on a PoS network, even the end-users have a job in supporting consensus. And when you do a job, you get paid! The job of someone who holds a PoS currency, should they choose to accept it, is to support decentralized security by “staking” their money to a node in the network. In exchange for participating in that way, end users in a PoS network also earn money from the pot of collected transaction fees.

Staking

Unlike PoW nodes who compete to mint a block by being the first to solve a puzzle, PoS nodes are selected, in large part, based on how much money they represent. “Represent” is a key word here; the amount of capital that a node operator themself stakes is meaningful, but unless they hold a LOT of crypto, they will also need the support of other currency-holders, in the form of staking.

Users in a PoS network who delegate their crypto holdings to a validator or pool of validators also earn rewards when their validator mints blocks and gets paid. These delegators can pick which validator to stake with. They might pick one that offers services, information, or perks that they like. They might pick a validator that is building a project they believe in and want to support with their stake.

While anyone can set up a validator node in a public permissionless network, actually getting picked (and getting paid!) to mint a block depends on representing enough “stake” to get chosen. So, PoS node operators must also compete – not to have the biggest fastest computer, but instead to capture the interest of end-users who want to earn staking rewards.

On Ethereum every validator needs to be represented by 32 Eth: no more, no less. If a company or group attracts users beyond 32 Eth, this will mean they have to create and maintain additional validator nodes, each with exactly 32 Eth, to be able to participate in block validation.

On Cardano there’s no fixed amount. 500 ada is required to register a validator node. Beyond that, representing a minimum of 1 ada would give a validator a (small) opportunity to validate blocks. If a pool has TOO MUCH stake, it will be considered “oversaturated.” Over saturation does not affect a validator’s chances of producing blocks; instead, it limits the payout. In this way, network incentives support decentralization: no single validator node controls too much stake, because users are motivated to stake with a validator that will pay optimal rewards.

While these basic principles are the common foundation of any PoS network, the end-user experience of staking on a PoS blockchain can vary a lot. Let’s look at staking on Ethereum and Cardano to get a sense of these variables.

Staking on Ethereum

Staking on Ethereum presents users with one of the most diverse menus of experiences among staking block chains. The experience ranges from a few simple clicks to very technical and complex. These options are, from easy to complex: Liquid, Managed, LiquidIndex, Pooled, Solo.

Liquid, Managed and Liquid Index

These types of staking services cater to users with less than 32 Eth or who don’t have the technical skills or desire to be a validator. Users send their Eth to the provider to pool and run one or more validators on their behalf.

Liquid, Liquid Index staking service providers will issue you an ERC-20 token (Liquid) or a token representing an index of staking token (Liquid Index) representing your stake. Since Ethereum locks up the 32 Eth, the token is a way to allow you to use the value of your Eth to participate in other blockchain activities. The token also, in a way, enables liquid staking - you can trade the token back to eth on an exchange without having to unlock the original eth from the network. This type of staking allows you to stake much lower amounts than the required 32 Eth. Some platforms for example allow you to stake as little as 0.01 Eth.

Alternatively to ERC-20 tokens, other service providers employ smart contracts to offer limited non-custodial staking (Managed staking). You put your eth in the smart contract, the provider can then use the Eth in the contract to run the validator. This type of provider tends to require larger minimum deposits than ERC-20 token-based staking service providers.

For both Liquid and Managed staking services, the provider sets the terms and conditions of the staking arrangement. Details such as when and how you get paid rewards, or how long it takes to get your money back are entirely up to them.

Also, since ethereum has slashing, meaning eth staked can be destroyed if the validator validates some of the network rules, it is up to your staking service provider to decide how to handle slashes - do they take the loss alone, or do they share it with their stakers?

Despite these risks and limitations, since Liquid, Managed and Liquid Index provides the easiest user experience, 55 to 60 percent of all Ethereum staking in 2023 was staked this way.

Solo and Pooled For the technical crowd, if you have 32 or a multiple of 32 eth, you can set up your network and servers to run a validator node per 32 as a Solo staker.

If you have multiples of 8, 16, or 24 Eth, you can set up networking and server(s) to run one or more validators as Pooled staker.

Providers in the case of Solo and Pooled staking are software service providers that sell easy tooling to launch and maintain your server - typically in a cloud infrastructure like AWS, or sometimes at home on a regular personal computer.

In the case of Pooled stakers, the providers will also provide smart contracts to help you:

  • Pool your Eth with others to come up with the 32 required Eth.
  • Process rewards
  • Handle slashes and penalties
  • Unstake your Eth
  • Withdraw Rewards

Finding the right provider can be a bit challenging or requires getting plugged into the community to know who to trust. This is because staking ultimately means transferring your Eth to a smart contract or wallet which someone else controls.

staking.directory provides a community directory of staking service providers. The site shows about 45 providers to choose from as of this writing. ethereum.org lists 6 of the most popular providers.

Withdrawing your rewards depends on the exact service provider. The Ethereum network itself has a limit on how many withdrawal transactions can happen in a block (16) but not a fixed time period. The exact time of how long the 32 Eth is released by Ethereum depends on how many others are trying to unlock their 32 Eths at the same time.

Staking on Cardano**

In the Cardano camp, staking is pretty straightforward. There are two types, Solo, or Pooled.

With solo staking, you run your node, then delegate to yourself.

Pooled staking is referred to as delegating. Within most wallets, you simply go to the staking tab, look up a pool and delegate to that pool.

Unlike Ethereum, when you delegate, you don’t send your Ada to anyone. All but 2 Ada stays in your wallet. You can spend it whenever you want or pick a new pool directly from your wallet anytime. It is recommended to have at least 5 Ada in your wallet when you stake for the first time. The 2 Ada is held as a deposit and is returned to you if you choose to undelegate.

The Cardano network pays delegators directly for staking, without having to go through your pool operator. There’s also no concept of slashing or penalty. If the pool operator you are staking with is running their server poorly, they will not be assigned future slots to validate new transactions.

You can withdraw your pending rewards anytime as long as you have enough ada in your wallet to pay the small transaction fee. There’s no limitation around how many others are withdrawing, etc. When you delegate for the first time, and completely undelegating takes 2 epochs (currently 10 days).

Cardano does not have a fixed number like Ethereums’ 32 eth per pool. Technically all existing ada can sit in one pool and that pool will be responsible for producing all the blocks. To encourage decentralization, there is a limit on how much rewards will be given to a single pool - a saturation cap.

Stakers are motivated to pick a validator that has enough stake to mint blocks and earn rewards, but not so much that the pool is oversaturated - which will reduce the rewards the pool (and its delegators) can earn.

Conclusion

Both Ethereum and Cardano platforms allow users to stake their native tokens (Ether for Ethereum and ADA for Cardano) to help secure the network. However, Ethereum requires non-technical users and users with less than 32 Eth to send their Ether to someone to stake on their behalf. On Cardano, the network handles the pooling for you, keeps the Ada in your wallet, and pays rewards directly from the network to all staker and pool operators.

Related Links

  • Celebrate Bitcoin Pizza Day by Ordering Pizza with Bitcoin blog
  • staking.directory website
  • ethereum.org/staking/pools website

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