Staked assets are some of the most popular ways to earn crypto without selling, although they use a different system compared to a savings account. They also carry more risk than most introductions fail to mention. Here is how crypto staking works in the current reality.
What Staking Actually Is?
Crypto staking is more than just a mechanism to earn passive income. It locks the cryptocurrency into a “Proof of Stake” network to help validate transactions. Blockchain relies on these validators to lock the staked coins as collateral and add new blocks.
The system directly replaces the mining system employed by Proof of Work networks, such as Bitcoin. When holders stake crypto, they act directly as validators, or they delegate the stake to one. This lets them contribute to the blockchain network security in exchange for a portion of the rewards.
The main distinction that beginners should understand is that earning staking rewards is only possible on a Proof of Stake blockchain, like Ethereum. Since Bitcoin uses Proof of Work, it can’t be staked. If a platform claims to offer Bitcoin staking, it’s either running with a non-standard definition or they’re trying to scam you.
How Staking Rewards Are Generated
Staked tokens come from two sources, depending on the network. This can be one of the following:
- Newly Issued Tokens: Many Proof of Stake networks will give out tokens as block rewards proportionally to validators and delegators. These block rewards help incentivize continuous participation.
- Transaction Fees: Some networks will allocate a portion of the network fees they collect from user activity straight to the stakers. This brings extra rewards for stakers who processed the blocks.
An important variable to keep in mind is that reward rates aren’t fixed, but fluctuate based on various factors. This includes the total crypto staked over the network, activity, and protocol rules. If the network has a high number of total stakes, the rewards are diluted because they are split evenly across all participants.
Beginners should also remember a key trade-off, where the rewards are paid in the staked token. Should the price of the token fall during the staking period, the fiat value may not be able to offset that. Rewards accumulate as tokens, but they do not protect against price volatility.
Three Ways to Stake Crypto
Staking is not a one-size-fits-all tactic. The method you use will determine how much control you hold over the account, the minimum amount needed, and the specific risks to take on. Here’s what you can go for:
Exchange Staking
Exchange staking is the most accessible entry point for beginners. Here, crypto holders will deposit cryptocurrency into the best crypto exchanges and use their dedicated staking products. The exchange will take care of all the technical issues, such as the validation process.
The advantage here is that there is no minimum stake and no technical setup required; the process takes only a few minutes. On the downside, the crypto exchange is the one that holds the keys, not the holder. This puts users on the grounds of custodial staking, where you are exposed to the same risks as storing crypto on a centralized platform. Should anything happen (e.g., a security breach or operational issues), your access may be delayed or affected.
Staking Pools
Staking pools use a more collective approach, as more holders combine their cryptocurrencies to meet validator minimums. Rewards are also shared proportionally. On the plus side, you can participate with smaller amounts, something you can’t easily do with solo staking.
On the downside, the pooled staking provider will take a commission from the rewards. Holders are also required to trust the reliability and infrastructure of the pool entirely. Validator downtime can reduce rewards on some networks.
Liquid Staking
Liquid staking is a method where the holder will stake their cryptocurrency and get a representative liquid token in return. The liquid staking token is mostly used in DeFi applications, while the underlying crypto keeps earning native staking rewards. The good news with this is that you won’t have to sacrifice any liquidity during the staking period.
The trade-off is that these staking options have smart contract risk. The protocol used to handle the stakes must be well-audited and secure; otherwise, you’re at risk. In some market conditions, the liquid token may trade at a slight discount to the underlying asset.
Which Cryptocurrencies Can Be Staked
Staking is possible on any blockchain that operates on Proof of Stake, but not every cryptocurrency will support it. Here are just a few where the system is supported.
| Cryptocurrency | Blockchain | Staking Supported |
|---|---|---|
| ETH | Ethereum | ✔ Yes (Proof of stake since the merge) |
| SOL | Solana | ✔ Yes (cool-down and warm-up periods apply) |
| ADA | Cardano | ✔ Yes (Doesn’t have fixed lock-up periods) |
| DOT | Polkadot | ✔ Yes (Includes multi-week unbonding periods) |
| BTC | Bitcoin | ✘ No (Proof of Work network that can’t be staked) |
| ATOM | Cosmos | ✔ Yes (Strict unbonding timeline) |
| AVAX | Avalanche | ✔ Yes (Minimum lockup required) |
Step-by-Step: How to Start Staking
Staking is a slightly different process depending on the type you choose to go for. Exchange staking is the more accessible option for beginners, so we will start with this option:
Step 1: Pick a Stakeable Cryptocurrency
Determine which Proof of Stake currency you already own, or find a good one to buy. Make sure it supports staking, and always check the staking period. This represents how long the funds will be locked before you can attempt to take them out.
Step 2: Choose Your Staking Method
Look at how much crypto you have and decide if you want to go for staking pools, exchange staking, or liquid staking. Assess the control you want and your overall comfort with the technical setup. Most beginners go for exchange staking the first time around.
Step 3: Transfer Crypto to the Staking Platform
Move your crypto to the platform or destination wallet. If you choose exchange staking and stake ETH or other supported assets, the tokens are already in your centralized exchange account. If you plan on using liquid staking, make sure to transfer the assets first into a working self-custody wallet.
Step 4: Initiate Your Stake
Token holders should choose the staking option on the platform and enter the amount they want to stake. The platform will process the transaction once the lock-up period and reward rates are confirmed. Stakers typically begin receiving rewards within one or two network epochs, though this depends on the blockchain protocol.
Step 5: Monitor the Stake and Manage It
Keep track of the rewards as they accumulate after you stake your crypto. If you use liquid staking, check the unstaking period as well. In some cases, the network requires stakers to perform a separate unstaking transaction before they can access their funds.
Risks That All Stakers Should Understand
It’s important to do your own research before you start staking so you can maintain a clear understanding of the variables involved. Here are some risks that beginners should consider:
- Lock-Up Periods: Some blockchain networks require you to lock up tokens for several days, weeks, or months. You can’t trade or move the assets during this time, even if market conditions change.
- Price Volatility: Staking rewards are paid in the same cryptocurrency that you stake. If the token loses significant value, the loss may outweigh the rewards earned.
- Slashing: Some Proof of Stake (PoS) networks penalize validators for dishonest behavior or downtime. This can lead to partial loss of staked funds or rewards.
- Smart Contract Risk: Decentralized platforms and liquid staking systems rely on smart contracts. If the protocol is exploited or contains vulnerabilities, your funds may be at risk.
- Platform Risk: Stakers rely on the operational integrity of the staking platform they use. In cases of security breaches, operational failures, or insolvency, access to funds may be compromised.
- Provider Selection: Don’t choose a staking platform at random. Research the provider thoroughly before committing your assets.
Top Tips Before You Stake
Staking crypto takes some time to get used to, but here are some tips to help you:
- Start with the minimum amount using a method you understand before committing larger sums.
- Always check market conditions and compare them with the lock-up period before staking.
- Thoroughly vet validators and make sure they maintain near-100% uptime metrics.
- Track your local tax obligations and keep records of your staking rewards, just in case.
You can use our detailed crypto tax guide for more insight once you start earning.
Final Words
Staking lets you participate in a blockchain network and earn rewards, but it’s not risk-free. The rewards are real, but so are the lock-up periods, price fluctuations, and platform considerations. Reading through crypto guides can give you a better understanding of this method before you start staking.
FAQ
Can I Stake Bitcoin?
No, you can’t stake Bitcoin, since it uses a Proof of Work blockchain consensus mechanism. If a platform claims to offer Bitcoin staking, it’s either missing some terms or lying.
How Much Can I Earn from Staking Crypto?
While it depends on the network, the amount earned ranges between 3 and 20%.
What Happens If I Need My Crypto Back Before the Lock-Up Period Ends?
There’s little you can do if the tokens are locked, and you’ll have to wait until the period passes.
Are Staking Rewards Taxable?
Yes. In most jurisdictions, staking rewards are treated as ordinary income. You are generally taxed on the fair market value of the tokens at the exact time you receive them.
