Why ETH Staking is a smart choice

The investment world has evolved significantly in recent years, with digital assets like Ethereum gaining mainstream attention as a viable option for earning passive income. 

One of the most popular ways of investing in Ethereum is 'staking,’ a process that involves depositing ETH in a dedicated smart contract and running a validator that helps secure the network, earning rewards in return.But how does Ethereum staking compare to traditional investments in terms of return (ROI)? 

This blog post explores the benefits of ETH staking over traditional investments and why it can be a smart choice for any investor.

Introduction to Ethereum Staking and Traditional Investments

Before diving into the benefits of staking Ethereum, it is important to understand the basics of Ethereum staking and how it differs from traditional investments. 

Ethereum is both a cryptocurrency and a blockchain platform that enables developers to build decentralized applications. Ethereum was created in 2015 by Vitalik Buterin and has become the foundation for Web3 and the second-largest cryptocurrency by market capitalization, second only to Bitcoin.

Traditional investments, on the other hand, are investments in stocks, bonds, and other financial assets that are traded on centralized exchanges. These investments have been around for centuries and are often seen as a safe and reliable way to invest money. However, these types of investments are not without their drawbacks - high fees, limited accessibility, and low returns.

Understanding the Concept of Ethereum Staking

When you stake Ethereum, you effectively ‘lend’ your coins to the network to help validate transactions and maintain its security by running a validator. Ethereum is a Proof of Stake (PoS) network, meaning it is secured by staked assets, not miners solving intricate puzzles.  In return, validators earn rewards based on the amount of Ethereum deposited and the length of time it has been staked. The longer you stake, the higher the potential rewards, and the more secure the network becomes.

Staking is a relatively new concept in the world of cryptocurrency, but it has quickly gained popularity due to its potential for high returns and lower risks.

More about Distributed Validator Tech (DVT) for Ethereum Staking:

How DVT Improves ETH staking

Since the Eth2 staking contract was launched in December 2020, more than 17 million ETH have been staked, demonstrating confidence in the network despite the withdrawal limitations that existed until the very recent Shapella upgrade.

ETH Staking Benefits

Return on Investment

One of the main benefits that staking Ethereum offers over traditional investments is the potential for stable returns. According to recent data, the average annual ROI for ETH staking is currently around 6%, significantly higher than the 4% average annual ROI for stocks.

Lower Fees 

With traditional investments, investors are subject to paying high fees to brokers and other intermediaries, and that can eat into their returns. For example, most full-service brokers charge a percentage (1 - 2%) of the total purchase price for stocks, a flat fee, or a combination of both. 

As a solo staker, there are no fees associated with staking your ETH. For those that don’t have the technical know-how or want the responsibility of running a validator node, staking as a service (SaaS) providers are available and charge much lower fees than brokers. 

More Accessible

With traditional investments, only those with significant amounts of capital can invest in the most lucrative opportunities. With staking, anyone can participate and earn a return on their investment without intermediaries. 

A Closer Look at ROI

To better understand the potential ROI of staking Ethereum as compared to traditional investments, it is important to compare the two side by side. As mentioned earlier, the average annual ROI for ETH staking is around 5.7%, while the average annual ROI for stocks is around 4%.

However if you are running an Ethereum validator with a 32 ETH deposit, you can achieve a much higher ROI over a ten year period if you are able to maintain your balance and rewards in the Ethereum staking contract.

For example, given an ETH price of $1,734.40 USD, the value of your original stake would be worth $57,450 after 1 year and $74,995 after 10 years.

Over time, ETH staking is expected to become the standard benchmark rate of the Ethereum ecosystem, similar to how the Fed Funds rate operates in the U.S. economy.

This may not seem like a significant difference, but over time, even small differences in ROI can add up to significant gains. For example, if you were to invest $10,000 in Ethereum and stake it for five years, you could potentially earn around $2,200 in rewards. If you were to invest the same amount in stocks and earn a 4% ROI, you would only earn around $2,000 in returns.

To the above scenario, add that the price of ETH is still at 64.43% of its highest recorded value (ATH).

Risks Associated with Staking Ethereum

Ethereum staking offers the potential for good rewards, with current estimates suggesting an annual return of around 5-10%. However, staking also carries risks, such as volatility in the cryptocurrency market.

Like all cryptocurrencies, the value of Ethereum can fluctuate drastically, which could potentially result in a partial loss of investment, especially for those running a full validator (32 ETH deposit) on the network (aka ‘solo staking’).

There is also the potential for hacking or other security breaches. While the Ethereum network is considered to be secure, hacking and other vulnerabilities could result in the loss of funds, especially when using a centralized exchange (CEX) for staking. 

I believe that the use of DVT will largely mitigate security risks.

While traditional investments still offer a range of options that can generate solid returns over time, they come with their own set of risks, like inflation, economic downturns, and changes in government policy.

With the current situation of inflation taking over the world's major economies and rising interest rates affecting macroeconomic values and having repercussions in the markets, the potential for ETH to become deflationary offers potential for both growth and market disruption.

With its lower fees, higher returns, and more accessible nature, ETH staking opens up new opportunities for investors of all levels.