How Does Ethereum Staking Work?

Ethereum staking is a process where investors earn a return that is calculated daily by locking up their Ether tokens in a smart contract. The Ethereum staking APY or  ethereum staking APR is the annual percentage yield or annual percentage return they earn by doing so.

Contrary to Bitcoin, Ether can be staked as it operates on a proof of stake (PoS) consensus algorithm since 2022. There was a glitch though. Until last year, Ether validators, those minting new Ether coins, saw their earnings locked up. Ethereum staking after Shanghai upgrade that took place in April 2023 changed this.

The upgrade finally allowed for the withdrawal or unstaking of the minted ethers that investors had long been waiting for. The staking returns can be paid out daily, just like interest rate payments. This is a major step forward in the evolution of blockchain and cryptocurrency technology toward a fully fledged financial system. 

Ether holders can now choose between staking, reclaiming (unstaking) previously staked Ethers, or earning Ether rewards that are automatically distributed to their crypto wallets. They can also choose to restake their Ether rewards. Here, earned rewards are added to the staked amount, to start earning more rewards – like a compound interest.

Best Ethereum staking for individual investors

For investors with technical skills and sufficient Ether in their crypto wallets, setting up their own validator node is a good alternative, generating higher rewards. But this isn’t an option for the majority of crypto investors.Instead, they can turn to staking pools or centralized crypto exchanges. However, staking pools charge fees of up to 25 percent of the total staking rewards and there are smart contract risks one needs to also be aware of.

Centralized crypto exchanges such as the Lykke exchange, generally offer the best solution to individual investors. It’s very easy to start staking. You just deposit or buy Ether staking tokens. The APR is calculated daily and is fully integrated into your crypto wallet. You are thus awarded a steady stream of earning. (Start staking here)

How is the ETH staking APR calculated?

The annual percentage return for Ether staking is subject to various factors, primarily influenced by the underlying Ethereum network activities. These factors include the total amount of Ethers staked, prevailing market conditions, and the specific staking rewards Ethereum offers. Currently, the minimum annualized staking reward rate on the Lykke exchange stands at2.1 percent. It's important to note that the Ether staking yield is calculated using a mathematical formula and may fluctuate based on network dynamics.

Why can’t you stake Bitcoin?

Bitcoin operates on a proof of work (PoW) consensus algorithm, which does not allow for staking. Bitcoin miners compete to resolve complex mathematical problems to create new blocks added to the Bitcoin blockchain and then validate transactions. This process require significant computational power and is energy intensive. The Bitcoin miners are then rewarded with new Bitcoins when they have successfully mined new blocks.

Today, roughly 40 percent of the Ether supply is “soft locked” onto the Ethereum blockchain through staking contracts. This helps to stabilize its price and can lead to potential increases in value.