Can I lose my Ethereum if I stake it?

by George Philip
Published: Last Updated on 0 comment

Many know that the Ethereum network provides its users with the possibility to earn through staking. However, not many of them are aware that staked coins can actually be lost. Let’s find out in what cases you can lose your Ethereum stake.

Introduction to Ethereum Staking

Before we reveal actions that can lead to a loss of stake in Ethereum, we need to answer the question: what is Ethereum staking? As you know, Ethereum is a blockchain network that works on the proof-of-stake consensus mechanism, which is less energy-consuming than Bitcoin’s proof-of-work. Instead of mining coins, this system bundles 32 blocks of transactions during each validation round. These bundles of blocks are called epochs, and every epoch becomes finalized once two more are added.

Ethereum stakers are then divided by the Beacon Chain into committees of 128. These committees are supposed to be assigned to shard blocks, propose a new block, and validate transactions in this block within a pre-determined period of time. It’s important to specify that new blocks are proposed by one of the committees, whilst the remaining 127 stakers have to deal with the validation of transactions inside the proposed block.

In a nutshell, the entire process within the Ethereum network is managed by the Beacon Chain, which collects information and distributes data to the shards of the network in order to ensure their complete synchronization.

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The finalization process starts when a transaction becomes an integral part of the block within the distributed network. When all the validators agree on this state of the block, the validation process in the proof-of-stake network is accomplished. Validators get their rewards from staking and validating.

What is Slashing and How Does it Work?

Here we come to the way by which stakers can lose their staked coins. This becomes possible as a result of slashing. What is slashing? In simple words, this is a penalty a validator can be punished with for inappropriate behavior during the transaction validation process.

As already mentioned, stakers of Ethereum are rewarded for validating transactions within the newly assigned blocks. However, if it appears that some of their actions are fraudulent or dishonest, the potential reward can get slashed. As a result, a staker will lose a certain number of ETH coins. The network will automatically destroy the ETH collateral as a form of penalty for malicious activities.

Such a punishment was designed in order to ensure that validators will work in the favor of the network. There are 4 basic offenses that can provoke the network to impose this penalty:

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  1. A staker-validator must not propose more than one distinct block at the same height.
  2. It’s not allowed to act as an attester who makes two different attestations for the same target checkpoint.
  3. The same source and target checkpoints must not be used for attesting to different head blocks.
  4. It’s forbidden to be an attester and make an attestation when the validator’s source and target votes “surround” those in another attestation from the same validator.

How Slashing Penalties are Applied

If a validator commits any of the listed above actions, he will be punished with slashing. Normally, this penalty amount to 1/32 of the effective balance, which is usually up to 1 ETH. The punishment is applied right after the detection of illegal activity.

In addition to this, a staker will be not allowed to participate in validation for around 36 days. Instead, the fraudulent participant will have to wait in the exit queue. For that time, the validator is disabled from any actions within the network and his own account, including making withdrawals. Basically, the lost amount equals the potential amount a staker would make if not violating the rules of the network.

Bear in mind, that the network can apply special severe penalties if more validators are messed up in slashing. In some cases, there’s the possibility of losing any access to Ethereum accounts.

How to Avoid Penalties

We hope that now you understand something more about the staking process on the Ethereum network. If you don’t want to lose your staked ETH, try to avoid dishonest offenses that violate the rules of the Network. In any other case, you aren’t supposed to lose any of your stakes.

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