How Ethereum Staking Works After the Merge

When Ethereum completed its transition from proof-of-work to proof-of-stake in September 2022 — an event the developer community called the Merge — it replaced energy-intensive mining with a system in which participants lock up, or “stake”, ETH to validate transactions. Understanding how that system operates is useful for anyone trying to make sense of Ethereum’s economics and security model.

From Mining to Validating

Under proof-of-work, miners competed to solve computationally expensive puzzles, and the winner earned the right to add the next block. Proof-of-stake replaces that competition with a selection process weighted by staked capital. Validators — the participants who lock ETH into a deposit contract — are chosen pseudo-randomly to propose blocks. Other validators then attest to the validity of those proposals. The more ETH a validator stakes, the greater their statistical chance of being selected in any given slot (a slot being a 12-second window in which a block can be added).

The minimum requirement to run an independent validator is 32 ETH, deposited into Ethereum’s staking contract. In return for honest participation, validators earn newly issued ETH as well as a share of transaction fees — specifically the priority fees that users attach to transactions to accelerate processing.

Rewards, Penalties and Slashing

Proof-of-stake introduces explicit economic penalties that proof-of-work did not have. Two mechanisms enforce honest behavior:

• Inactivity penalties: validators that go offline and fail to attest gradually lose a small fraction of their staked ETH. The rate accelerates if a large proportion of the network goes offline simultaneously, which is by design — the protocol punishes scenarios that could halt the chain.
• Slashing: validators that demonstrably break the rules — for example, signing two conflicting blocks in the same slot — face a more severe penalty. A portion of their staked ETH is destroyed, and they are ejected from the validator set. The slashing mechanism is specifically designed to make certain attacks prohibitively expensive.

Both penalties are deducted directly from a validator’s deposited stake, so the 32 ETH floor is also the principal at risk. Running well-maintained validator software on reliable infrastructure is therefore not optional; it is an economic necessity.

Withdrawal Epochs and the Shanghai Upgrade

At the time of the Merge, staked ETH could not be withdrawn. That changed in April 2023 with the Shanghai upgrade (also called Shapella), which introduced two withdrawal types. Partial withdrawals allow validators to automatically sweep any rewards that have accrued above the 32 ETH principal to a designated Ethereum address, and these occur in a rolling queue processed each epoch (roughly 6.4 minutes). Full withdrawals allow validators to exit entirely, recovering their principal after serving a waiting period determined by the size of the exit queue at the time of the request. During periods of high exit demand, this queue can extend to days or weeks.

The existence of an exit queue matters for anyone assessing the liquidity profile of staked positions. ETH is not instantly redeemable; the protocol imposes a deliberate delay to prevent rapid de-staking events that could destabilise the validator set.

Participation Without 32 ETH: Pooled and Liquid Staking

The 32 ETH threshold is beyond the means of most individual holders, which has driven significant adoption of pooled staking services. These fall into two broad categories. Centralised exchanges such as Coinbase and Binance aggregate user deposits and operate validators on their behalf, distributing rewards minus a fee. Decentralised liquid staking protocols — Lido being the largest by volume — issue a derivative token representing a staked position; holders of that token continue to earn staking rewards while retaining the ability to trade or deploy the derivative in other on-chain applications.

For a fuller account of how liquid staking tokens work and their role in restaking protocols, see our companion piece on Ethereum price and on-chain metrics. The economic and concentration risks that pooled staking introduces — particularly the debate around any single entity controlling more than one third of staked ETH — are among the more consequential governance questions currently before the Ethereum community.

Staking is now the mechanism by which Ethereum’s chain is finalised, its issuance is distributed, and its security budget is maintained. Grasping its mechanics is foundational to understanding Ethereum as a financial and technical system.