Staking is a way of earning rewards from your cryptocurrency holdings.
It involves lending your crypto to a blockchain network. The network then uses that crypto to do things like confirm transactions and keep the network safe from hacks or disruptions.
In return for this, you're rewarded with new coins or tokens.
It's a bit like if you loaned your tools to a friend so they could build something. And in return, they gave you your tools back plus some shiny new ones as a way of saying thank you.
It is of course, a lot more technical than that, but the general idea of lending something in return for a reward is pretty straightforward.
Some popular blockchain networks or services that use staking include Ethereum (ETH), Solana (SOL) and Polygon (MATIC).
Most new blockchains and cryptocurrencies support staking in some way.
So if you're interested in earning rewards through staking, it's worth taking a bit of time to learn how it works and some of the risks involved.
Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific
provider, service or offering. It is not a recommendation to trade.
What is staking?
Staking involves locking up cryptocurrency temporarily, in order to help secure a blockchain network. In return for this, stakers are rewarded with newly minted cryptocurrency.
Exactly how staking works varies depending on the exact coin or service being used.
Proof of stake (PoS) is the most famous method of staking and is used by blockchains such as Ethereum.
Proof of stake explained
Proof of stake (PoS) is a technical term that describes how a blockchain validates transactions.
It is a type of consensus mechanism and is different to the one used by Bitcoin which is called proof of work (PoW).
In PoW, hundreds of thousands of specialised computers compete to solve complex maths puzzles. This process is very energy-intensive and one of the reasons Bitcoin is considered bad for the environment.
PoS solves this energy problem by randomly choosing one computer (validator) at a time to process transactions. This massively reduces the amount of energy required.
To participate in this system, validators must lock up (stake) a large number of coins as collateral. This helps keep validators economically aligned with the system, incentivises good behaviour and disincentivises fraud.
How does staking work?
In a staking system like PoS, there are several validators.
Validators are normal computers that run specialised software. That software is used to validate transactions (e.g. when you send coins from one address to another) and keep the blockchain running.
But to operate a validator – or node, as they're sometimes called – you need to stake a certain number of coins as collateral.
This collateral helps ensure several things:
- It provides an incentive to be honest when validating transactions.
- If someone attempts to submit a fraudulent transaction (like send themselves money) then the coins they had staked will be taken away from them as punishment.
- In return for validating the network, stakers are rewarded with new coins.
Staking provides a financial incentive to do the right thing and a disincentive to commit fraud.
How to stake crypto
There are a number of ways to stake crypto and they will each depend on the cryptocurrency you want to stake.
The easiest way is with a compatible cryptocurrency wallet or exchange.
These services simplify the process for you, by allowing you to join a staking pool.
A staking pool lets you stake your crypto without needing to run the hardware and software yourself. Instead, you simply lend your coins to the pool, which takes care of the hard work and stakes them on your behalf, in return for a fee.
It also reduces the minimum amount required for staking, which for some networks can be tens of thousands of dollars' worth of coins.
Some other ways you can stake crypto include:
On-chain
This involves using a Web3 wallet such as Metamask to stake your crypto using a website.
The website connects you to a blockchain-based application that lets you stake your crypto.
Which website or blockchain you use will depend entirely on the crypto you want to stake.
Buy a liquid staking derivative (LSD)
Another simple way of getting staking rewards is by purchasing a special type of token called a liquid staking derivative (LSD).
An LSD represents ownership of an already staked crypto, like ETH or SOL.
The amount of the LSD gradually appreciates over time, which represents your staking rewards.
For instance, the stETH token from Lido is the most popular ETH LSD. If you buy 0.5 stETH, your balance will gradually increase from 0.5 to 0.6 as staking rewards are added.
LSDs like stETH can be purchased on most cryptocurrency exchanges.
What are the benefits of staking crypto?
Staking is one of the most simple ways to be an active member of the blockchain community and provides several benefits for doing so.
- Earning rewards. Staking allows you to earn passive rewards from your cryptocurrency holdings.
- Network security. By participating in staking you help keep blockchains and protocols secure.
- Blockchain governance. Staking sometimes allows you to vote on governance proposals and participate in blockchain governance.
- Airdrops. Airdrops are an increasingly popular trend in crypto where free coins and tokens are given to users who meet certain criteria. Participating in staking or governance may increase your chances of receiving an airdrop, especially on networks like Cosmos and Celestia.
What are the risks?
While staking appears simple and straightforward, some systems like PoS are quite complex behind the scenes.
If you're using a staking pool through a wallet or exchange you won't be exposed to the technical side of things, but you should still be aware of the risks.
Likewise, if you plan on running an entire validator node yourself, then you should read the associated documentation thoroughly before investing any funds.
Some of the risks associated with staking include:
- Slashing. Stakers can lose a portion of their staked crypto for failing to abide by the rules. For instance, if a validator submits fraudulent transactions or fails to keep their node connected to the network, then they may be financially penalised for it, in a process called slashing. Slashing is intended to disincentivise fraud and keep the network functioning as normal.
- Lock-up periods. There may be a minimum lock-up period for how long your coins need to be deposited for. The period varies on the type of blockchain or service used for staking. During the lock-up period, the funds cannot be withdrawn or sold.
- Voting rights. By staking through a pool, you typically give up your voting rights and instead hand them over to the pool operator. This can result in the centralisation of voting power, which may be an issue for some people.
- Market risk. Staking doesn't reduce the various risks involved with cryptocurrency markets. If the price of your staked crypto falls in the market, the value of the staked amount decreases as well and so do the attached rewards that come with it.
- Fees. While staking pools are one of the most convenient ways to stake crypto, they do charge a fee. These fees can vary wildly between providers, so make sure to compare fees before you stake.
- Airdrops. If you stake through a pool, you may be ineligible to receive airdrops. This will depend on many factors, such as the network, crypto staked and criteria of the airdrop.
Three ways I stake
Having the minimum amount of cryptocurrency to run an entire node can be really expensive. To get around this, I stake through a pool which means I only need a few coins or tokens to get started. I'm currently staking a few Ether (ETH) through Lido which I do directly through their website. In return I get a liquid staking derivative (LSD) called stETH which represents my stake in the pool and automatically accrues rewards. I'm also staking Avalanche (AVAX) through a pool on Binance, and Cosmos (ATOM) on my Ledger Nano X wallet.
— James Edwards, Cryptocurrency Editor
Where to stake coins
The token holder can stake their coins either through their own cryptocurrency wallet or through cryptocurrency exchanges, such as Binance or Coinbase, that offer staking services to users that register on their platform. There are several cryptocurrency wallets through which users can stake their cryptocurrency funds. You can find a list of these wallets below.
Several centralised and decentralised exchanges offer staking services on various tokens. Here is a list of a few of the major exchanges that offer these services:
What coins can you stake?
Most of the native tokens of PoS blockchains can be used as a tool for staking. Here is a non-exhaustive list of cryptocurrency tokens that can be staked on their blockchain either through wallets or cryptocurrency exchanges:
#
F
G
H
I
J
L
M
O
R
W
X
Y
Z
What rewards can you earn through staking?
Each blockchain or smart contract may use a different method of assigning and calculating staking rewards. The profitability of the rewards is highly dependent on the structure and conditions of the staking rewards of that particular network. A few blockchains offer a fixed percentage of the funds as a staking reward, while many others base the rewards on various factors. Some of these factors are listed below:
- The inflation rate prevailing in the economy.
- The number of coins staked in the network in total.
- The duration for which a particular staker has been involved in the staking process.
- The number of tokens staked by the holder.
Wallets for staking
Here is a non-exhaustive list of cryptocurrency wallets that allow users to stake digital tokens directly from their own wallets where they hold their cryptocurrencies:
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly
volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of
future performance. Consider your own circumstances, and obtain your own advice, before relying on this information.
You should also verify the nature of any product or service (including its legal status and relevant regulatory
requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.
