How to earn passive income with Ethereum?

Ethereum is the second-most popular crypto in the world, surpassed only by Bitcoin. Unlike Bitcoin, it is possible to earn passive income with Ethereum’s coin, Ether, also known as ETH.

The process involves “locking up” your ETH and earning a small unit of ETH on a daily basis. We will learn how we’re going to do that using a free decentralised service called Lido. 

Also worth noting, a term that you will come across is “staking“, which is synonymous to locking up your ETH. Using Lido, you can stake your ETH and earn some passive income.

What is Lido?

Lido (lido.fi) is a popular decentralised service for staking ETH. It’s decentralised because it’s not owned by a single registered business, or generally any single entity.

Instead, it is a collaborative project where developers from around the world contribute and maintain the software that powers this service.

At the time of writing, $32 billion worth of ETH has been staked with the help of Lido, which has also been around since 2020. This makes Lido seem more trustworthy as it has been battle tested for quite some time. It is also beginner-friendly for those looking to try staking for the first time.

How does staking work on Lido?

By now, you might think that staking works like a term deposit at a bank, where you get to earn an interest on money that you essentially lend to a bank for a duration. This is not quite how staking works.

Under the hood, when you stake some ETH, you’re locking it up into a special type of Ethereum account, which also contains ETH coins belonging to other people.

You have a direct claim over ETH that you staked, as well as other people who staked their ETH on Lido. This means at any given time, you can “unstake” and return the staked ETH back to your wallet.

But how does staking earn passive income? Hint: It’s not magic.

Validators are crucial members of the Ethereum network. Without them, Ethereum wouldn’t function properly, and without enough of them, the network would not be secure against any attacker. Validators process Ethereum transactions 24/7, and have the privilege of earning ETH through fees and newly minted ETH as a reward for their service.

This ETH reward, given by the network itself, is the source of passive income for validators. However, becoming a validator requires technical knowledge in software and hardware, and a hefty sum of 32 ETH — a starting capital that is too steep for some who only have the former.

Validator techies can work together with those who have the financial means, to create a properly functioning validator and share the rewards.

This is where Lido also comes in. Lido is the platform that connects ETH holders to validators, essentially creating a win-win situation for all users of the Ethereum ecosystem.

Staking with Lido gives you stETH

When you stake your ETH, it will take time to unstake them. That means, for a time being, staked ETH will not be liquid and you won’t be able to send or sell them. Also, claiming the ETH rewards isn’t a straightforward process. 

Lido overcomes these issues by giving stakers the liquid staked-ETH token or stETH that represent their share of the stake in the Lido staking pool. This means for any amount of ETH you stake at Lido, you will receive the same amount in stETH in return.

stETH bears the value of ETH*, so if 1 ETH is now worth $5500 (NZ) then 1 stETH is also $5500. This is an incredible system, because not only can you earn passive income in ETH (that you have claim over), you’re also able to swap stETH back to ETH at any time using an exchange. 

In addition, Lido makes it easy to gain access to your accruing passive income. Every day, your stETH balance will reflect the amount you have earned in ETH. This means there’s no need to manually claim the ETH rewards as you’ll have the exact value of the rewards at hand in the stETH tokens you own.

This is why Lido has become one of the most popular options out there for “liquid staking”, as it allows you to maintain liquidity while still being able to earn income through staked ETH. 

*) The market determines the value of stETH based on holders’ confidence. On rare conditions when market volatility was extreme, such as that following the collapse of Celcius in November 2021, stETH “depegged” or temporarily lost its equivalence to ETH when prominent stETH holders rushed to sell it for ETH. Otherwise under normal circumstances, stETH maintains a 1:1 value relative to ETH.

How much can you earn while staking with Lido?

The current annual percentage yield (APY) for staking ETH with Lido is approximately 3.15% to 3.18%. For example, staking 1 ETH at an APY of 3.18% would yield 0.0318 ETH annually. 

Understandably, 3.18% isn’t a wonderful return rate. Lido makes it so easy for investors to flock in and stake any amount of ETH. When there is a finite rate of which ETH is rewarded to validators, the earning rate can potentially get smaller when the rewards are shared among more and more investors.

However, this 3.18% yield is not in dollar terms, but in ETH. So, for instance, if ETH goes up by 2x over the next 12 months, this translates to a yield of 6.18% in dollar terms. 

In summary 

Ethereum, the second-most popular cryptocurrency, offers a way to earn passive income through staking, specifically using a decentralised service called Lido.

By locking up ETH, users can earn daily rewards in ETH. Lido, a trustworthy platform with over $32 billion staked since 2020, simplifies the staking process and connects ETH holders to validators, who maintain the Ethereum network and earn rewards.

Stakers receive stETH tokens, which are liquid and can be traded back to ETH, reflecting accrued rewards daily.

The annual percentage yield (APY) for staking with Lido is around 3.15% to 3.18%, with potential for higher returns if the value of ETH increases. This system allows for maintaining liquidity while earning passive income.

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