Today, CMC Academy discusses the ways of staking crypto on Coinbase, along with its benefits and the risks involved.
What Is Staking?
Some blockchain protocols, like Ethereum, Cardano and Solana, allow participants to earn additional cryptocurrency by contributing to the network. This contribution is in the form of staking, which is used to validate transactions and support the stability of the blockchain network. In contrast, proof-of-work (PoW) blockchains, like Bitcoin, use miners to verify transactions and secure the network.
Due to the inherent scalability problem of PoW blockchains, many protocols have turned to staking as a way to incentivize users to contribute to the security and stability of their networks. By staking your crypto, you are essentially backing a specific validator to certify only legitimate transactions on the blockchain. In return, a portion of the network fees will be distributed back to you and other stakers.
There are a number of ways to stake your cryptocurrency, each offering a different level of difficulty. In general, you can either opt to use your own computer to validate transactions (solo staking) or delegate your cryptocurrency to someone who handles all the backend technicalities on your behalf.
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How to Stake Ethereum on Coinbase
Ethereum is the second-largest cryptocurrency by market capitalization. Although originally deployed as a PoW blockchain, work has been on the way to migrate from a proof-of-work consensus mechanism to proof-of-stake (PoS) since 2015. However, it wasn’t until December 2020 that the concept was explored through the launch of Beacon Chain, and on September 15, 2022, the Ethereum network fully transitioned to PoS consensus.
As of October 13, 2022, 14,999,575 Ether tokens have been staked on the Ethereum Beacon Chain smart contract from a total of 443,038 validators.
As already mentioned, there are several ways to stake Ethereum and cryptocurrencies in general. Coinbase offers a built-in staking feature that allows customers to stake their Ethereum. To use this service, you will need to first sign up for an account with the crypto exchange.
1. Register an account: Creating a new account with Coinbase is a fairly straightforward process. You need a government-issued ID card to prove that you are 18 years or older, an active phone number, and an email address.
Visit the Coinbase website to begin the sign-up process. Enter your information such as name, email and password to create a free account. Then proceed to verify your email address, phone number and identity. It is also important to link a payment method like a bank account, PayPal, debit card or Apple Pay in order to fund your account. Once you’ve created an account on Coinbase, proceed to the next step.
2. Buy Ethereum: It’s a no-brainer — you need to have some Ether to stake on the Ethereum blockchain. Coinbase allows you to buy Ether (the native currency of the Ethereum network) directly.
3. Stake your ETH: The next step is to select Ethereum from the “Assets” tab. Scroll down and click the “Stake now” button. Read through the details and confirm that you are okay with the terms by clicking the “I understand” button.
Since Coinbase runs several validator nodes, all a user needs to do is deposit any amount of ETH to stake, and the exchange takes care of the rest. At the time of writing, the Ethereum network is offering an annual return of 3.65%. It is also worth mentioning that as per the Ethereum protocol, ETH staked on Coinbase will be locked up and inaccessible until Ethereum’s planned Shanghai update.
Should I Stake My Ethereum on Coinbase?
To answer this question, it is important to know all the available options when it comes to staking Ethereum. According to Ethereum.org, there are four ways to stake ETH; solo home staking, staking-as-a-service, pooled staking and staking through centralized exchanges.
- Staking Through Centralized Exchanges: Starting with the obvious, crypto exchanges like Coinbase, Binance, KuCoin and Kraken offer staking services. While this is the simplest way to stake your Ethereum, you will be handing over custody of your crypto assets to a centralized exchange, and because these service providers consolidate large pools of ETH to run large numbers of validators, they become juicy targets for attackers. They also create large points of failure that are vulnerable to bugs.
- Pros
- Easy to set up
- Requires little to no technical knowledge
- You can stake a fraction of an Ether
- Handles custody of crypto assets
- Cons
- Lesser rewards due to service charge
- You lose custody and control of your cryptocurrency
- Encourages centralization
- Solo Home Staking: If you are not comfortable with losing custody of your ETH, setting up your own staking infrastructure may be the way to go. Solo staking has been described as the “gold standard” for staking. However, we must warn you that this form of staking can be complicated. It requires proper computing equipment and software, as well as a copy of Ethereum’s entire transaction history. It also has a high cost of entry.
- Pros
- Offers the best reward since you will receive full rewards directly from the protocol
- Improves the decentralization of the network
- Rewards participants for batching transactions into a new block or checking the work of other validators
- Gives full control over assets
- Cons
- High cost of entry. You need to own at least 32 ETH (over $40,000) to get started.
- Requires a dedicated computer and enough technical know-how to run the staking software.
- There are penalties for going offline, meaning your dedicated computer must be connected to the internet almost 24/7.
- Staking-as-a-Service: Similar to solo staking, staking-as-a-service requires 32 ETH. However, you won’t have to deal with any hardware in this form of staking since service providers allow you to delegate the hardware part. It generally involves creating a set of validator credentials and then uploading your signing keys to the service provider.
- Pros
- Offers full protocol rewards minus monthly fees for node operations
- Gives full control over assets
- Easy to keep track of your validator client
- Less technical and cumbersome when compared to solo staking
- Cons
- High cost of entry
- Entrusting your singing keys to a third party could be risky
- Counterparty risk from the service provider could see you penalized for going offline
- Pooled Staking: The fourth and final option when it comes to staking Ethereum is pooled staking. Just like staking on a crypto exchange, pooled staking allows you to stake any amount of Ether. Most of the pool staking options involve liquid staking, an innovative alternative to bypass the risks associated with illiquidity, complexity and centralization. This means you will receive liquidity tokens that represent your staked ETH, which allows you to exit your position without un-staking the actual ETH.
There are a few important things to look out for when joining a pool, including the prospective validator’s track record, fees and commissions, and their policies for protecting people who delegate tokens.
- Pros
- Pooled staking services generally offer one or more liquidity tokens that represent your staked ETH in addition to your share of the validator rewards.
- Ability to exit at any time
- Liquidity tokens can be held in your own wallet or used in other DeFi services
- Low cost of entry
- Cons
- Varying degrees of risk, including counter-party, smart contract, and execution risks.
How to Stake Cardano (ADA) on Coinbase
In March 2022, Coinbase announced that it was expanding its staking service to Cardano (ADA) holders. Although the crypto exchange initially predicted that staking Cardano would yield around 3.75% annually, the annual percentage yield (APY) on the asset is 2.6% at the time of writing. Furthermore, customers will start receiving rewards to their account every five to seven days after an initial lockup period of 20 to 25 days.
It is important to note that the APY is determined by the Cardano network based on the number of staking participants. Coinbase charges a commission for providing the staking service and distributes the profit to users.
The process of staking Cardano on Coinbase is relatively the same as that of Ethereum. To get started, you will need to buy some ADA on Coinbase or deposit the tokens from an external wallet into your Coinbase account.
Users can opt-out of Coinbase’s Cardano staking service at any time.
How to Stake Solana (SOL) on Coinbase
The estimated annual return for Solana staking on Coinbase is 4% (at the time of writing). The rewards are distributed every three to four days. Upon staking, the crypto exchange will distribute this reward after removing its standard 25% commission for staking services. To stake SOL on Coinbase, follow the steps below:
1. Create an account on Coinbase
2. Purchase SOL directly on Coinbase or transfer from an external wallet
3. According to the exchange, “if you’re eligible for staking and meet the minimum balance of [$1 worth of SOL], you’ll be automatically opted in and begin earning rewards.”
4. The first reward is credited after approximately 5-7 days. Subsequent rewards are received within 3-4 days.
Risks of Crypto Staking
As with most investments, staking crypto comes with its own risks. Here’s a rundown of some of the risks you may face if you decide to stake your digital assets.
Market Risk: It’s a no-brainer, the crypto market is highly volatile, with constantly swinging prices. For instance, on November 10, 2021, Bitcoin surged to a new all-time high of $69,000 only to crash to around $63,000 24 hours later. It is not uncommon for the crypto market to experience violent market swings, which may ultimately affect the value of your staked tokens.
While the staking option you opt for may offer lucrative annual returns, you could still end up incurring losses if the price of your staked tokens falls.
Liquidity and Lock-in Period: An asset is considered liquid if it can be easily bought or sold or converted into cash. Cryptocurrencies are one of the most liquid assets since they can be sold at virtually any time of the day. However, this could quickly become a problem when you stake smaller and less popular cryptocurrencies. If this is the case, you may not be able to cash out your rewards.
Meanwhile, although there are some crypto staking options that do not require you to lock up your crypto, the majority of the legacy projects still have a minimum lock-up period. Your staked funds will be inaccessible during this period. Investors who staked ETH on the Beacon Chain have had to wait for nearly two years. As a result, if you suddenly need your staked funds for something else or you decide that you are no longer interested in staking your coins, there may be no quick way to get back your funds.
Theft: The number of crypto-related thefts has escalated over the years. Whether you choose to deploy your own staking infrastructure or rely on a third-party service like a crypto exchange, the problem of theft and loss of funds still remains. On a personal level, you could lose your private key, giving a malicious actor access to your funds. Crypto staking platforms can also get hacked, and if something major goes wrong within a network, you could still lose your staked funds.
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