The long transition towards Ethereum 2 appears to have finally been making much more progress during the last year. Last December, the ability to deposit your ethereum into a staking contract and earn rewards was introduced. At the beginning of August EIP 1559 will be introduced; which will change the ethereum blockchain into a deflationary chain. This will be achieved by burning ethereum with each and every transaction. If you are an ethereum fan this is a very exciting time for you.
One of my biggest passions in my journey towards reaching financial freedom is earning passive income. There are some amazing opportunities out there. Perhaps you already know that bitcoin is my coin of choice, and it has proven to be my largest passive income earning. I achieve those earnings by lending out BTC to services like Celsius, Ledn, BlockFi and Nexo. That has gone great until recently when these services began lowering their reward rates. Causing me to question whether it is worth the risk to use these services and give up custody to my treasured asset. Because earning passive income is my goal, this has led me to explore other opportunities.
This led me to ethereum. Yes, you can lend out your ethereum to the services above and earn a passive income from doing so. But there is one thing that you can do with ethereum that you cannot with bitcoin. That is the ability to stake your ethereum and interest passive income from it. Last year when staking was introduced, this was an incredible opportunity; as the interest earned was well over 10%, with some places being around 20%. Naturally the high interest rate instantly appealed to me. It is very rare to have such a great opportunity to earn a great interest rate on one of the blue-chip assets. It would be like earning 20% on your Apple or Tesla stocks. But, there was part of this process that appealed to me more than the rest. This was the fact that no one else would have custody over your ethereum. You have to deposit your ethereum into the contract, but no one else would be holding the keys, which happens on lending services like BlockFi. Recently there have been quite a large amount of FUD around BlockFI, large enough for me to lose trust and withdraw all of my funds from the service. I recently even received a email from BlockFi wanting to know why I withdrew such a large amount from the service, and how they could improve.
So you had two incredible things working for staking your ethereum, a high interest rate, and it being a safer process. If you have 32 ethereum or more you can be your own validator and earn much more ethereum rewards. But in my situation, I wasn't staking 32 ethereum; so I will not discuss that portion of this. But don't worry, if you have less than 32 ethereum, you can still stake your ethereum. But you will have to join pools or give up custody to exchanges. For example, both Coinbase and Kraken offer Ethereum staking services, even if you have less than 32 ethereum.
But be careful, staking on exchanges, especially Coinbase will make you lose out on a lot of profits. Coinbase actually takes out 25% of your staking rewards and gives you the remaining 75%. Kraken isn't that much better. I initially decided to stake my Ethereum on Kraken. At the beginning those fees were a non-issue for me. The reason for that was because the interest rate for staking ethereum was 12% or higher. It was much higher than you would find anywhere else for lending, and so I accepted it.
There is a problem though. As more and more people stake their ethereum, the staking interest rate also decreases. Last year in December was the gold period, and I'm so glad I got in early. But the rate has now dropped in half. In fact, Coinbase is only offering 5% on their Ethereum staking. Which is even lower than you can receive by lending at Celsius; which currently offers a rate of about 5.35%.
Let me say this; earning 5% on a blue-chip like ethereum is still an amazing opportunity. There is one drawback to staking that I haven't mentioned yet, and this is the reason why I stopped staking my ethereum. Once you deposit your Ethereum 2.0 into the staking contract, it is locked there. This ETH will be locked into the contract until the two chains, ethereum and ethereum 2.0, merge into one. For true believers of ethereum this is no issue. But, no one knows when this will happen. It could be 4 months from now. It could be another year, or two years. It may never happen. It is a risk that you must be aware of before you decide what to do.
So after taking into account the fact that you can get a higher or similar interest rate by lending. Also you can keep liquidity and sell your eth, use it for DeFi or whatever your need may be. These are the reasons why I decided to stop staking my new ethereum, and instead lend it out. But don't get me wrong. I think staking ethereum is a great opportunity, and I'm excited to participate in the future once the two chains have merged. While we don't have any guarantees of what the cryptocurrency lending market will look like in the next few years, we do have somewhat an idea what the staking environment on Ethereum will look like. It is written into the code after all.
How about you? Are staking your Ethereum or using lending services? What's your favorite way to earn passive income in cryptocurrency?
As always, thank you for reading!