Proof of Stake

Ethereum operates on a Proof of Stake (PoS) mechanism, unlike Bitcoin, which relies on Proof of Work (PoW). In simple terms, if you want to be a miner (technically called a "validator") on the Ethereum network, you need to stake at least 32 ETH. The more ETH you stake, the more transactions you can approve, and the more blocks you can validate.

But why does Ethereum use PoS? What’s the benefit of this system?

Here's how it works: If a validator proposes an invalid block, other nodes in the network will reject it. On top of that, the validator will lose some of their staked ETH as a penalty for trying to manipulate the system. The higher the stake, the greater the penalty. This discourages bad actors from proposing fake transactions because they risk losing their own money.

Since validators with higher stakes have more to lose, they’re naturally more accountable. This is why the Ethereum network allows them to approve more transactions, it ensures that those who have the most at stake are the most responsible.

Now, how do miners/validators make money? Every time a block is successfully validated, Ethereum rewards the validator with ETH. That’s how validators earn from the chain.

Can You Run an Ethereum Node to Make Money?

Yes, but there’s a catch. Running your own Ethereum validator requires a minimum of 32 ETH, which is a lot of money for most people. Plus, to actually make good returns, you'd need to stake even more than that.

Since most people can’t afford to stake that much, crypto companies stepped in to solve this problem.

Staking in Ethereum

Large, trusted crypto companies offer a way for regular users to stake Ethereum without needing 32 ETH. In return, users get an annual reward of about 4-5% on their staked ETH.

How does it work?

These companies pool together ETH from thousands of users and stake it under a single validator node. Since their node is validating multiple blocks, it earns ETH rewards. They then distribute a portion of those rewards back to users who contributed ETH.

For example, if you stake 100 ETH through Coinbase, after a year, you might have around 105 ETH, depending on the staking rewards earned by the validator. No need to run your own node, no need to worry about slashing penalties, just passive income.

What are LSTs (Liquid Staking Tokens) ?

You’ve probably seen tokens like stETH (Lido's staked Ethereum) or mSOL (Marinade’s staked Solana), these are called Liquid Staking Tokens (LSTs).

When you stake ETH (or Solana) with a liquid staking platform, you don’t lose access to your funds. Instead, the platform mints a new token (like stETH or mSOL) that represents your staked assets.

Why does this matter?

Traditional staking locks up your funds, meaning you can’t use them until you unstake. But with LSTs, you can trade, sell, or use them in DeFi while still earning staking rewards.

How does the value of LSTs increase?

Let’s take mSOL as an example:

Initially, 1 SOL = 1 mSOL.
As staking rewards are earned, the value of mSOL increases.
Suppose after some time, 1 mSOL = 1.28 SOL.
If you had staked 1 SOL at the beginning, you would still hold 1 mSOL, but if you swap it back, you now get 1.28 SOL, a 28% increase in value.

This is why many people prefer LSTs over directly staking, they get staking rewards while still having liquid assets they can use.

Final Thoughts

Ethereum's Proof of Stake system makes the network secure, decentralized, and efficient. Liquid staking and LSTs take it even further by making staking accessible to everyone and ensuring your ETH is never locked up.

If you’re into staking but don’t want your funds to be stuck, LSTs are the way to go. Your money keeps growing, and you stay liquid, win-win hehe.

Understanding Ethereum Staking & Liquid Staking Tokens (LSTs)