“What is staking crypto” is one of the most searched questions in crypto. The short answer: staking means locking up tokens so you help secure a proof-of-stake blockchain, and you get rewards in return. The longer answer covers where those rewards come from, what risks come with them, and why the advertised yield is never the whole picture.
Proof of stake in plain words
A blockchain must decide who gets to add the next block. In proof-of-work systems like Bitcoin, miners compete with computing power. In proof-of-stake (PoS), validators are chosen in proportion to how many of the network’s tokens they hold and lock up. Wikipedia notes that this avoids the heavy computing cost of proof of work, which makes PoS much more energy-efficient. The first working PoS cryptocurrency was Peercoin, in 2012.
Security comes from the stake itself. To attack the network, someone would need to acquire a large share of all tokens, which is very expensive. In most protocols, validators get rewards for honest work.
Where staking rewards come from
On Ethereum, which moved to proof of stake, new ETH is created at the end of each epoch and added to the balances of validators that made valid proposals or attestations. Validators also receive the “tip” part of transaction fees, while the base fee is burned. Your staking yield is therefore a mix of new token issuance and fee income. It is not interest paid by a borrower.
Research cited on Wikipedia models the expected staking return as the average staking gain divided by the total coins staked. That means yields fall as more people stake, and they move with network activity.
Ways people stake
- Running a validator: you control the keys and the node, but you also carry the technical risk.
- Delegated proof of stake (DPoS): holders vote for a small set of block producers. This model is used by EOS, Lisk and Tron.
- Liquid proof of stake: small holders delegate to larger validators and can switch at any time, as on Tezos.
- Committee-based or nominated PoS: validators are chosen at random, weighted by stake. It is used, for example, in Ouroboros Praos and in Polkadot’s variant.
Risks you accept
Slashing. Protocols punish validators that misbehave, for example by signing conflicting chains. Slashing reduces expected rewards, and if you delegate, a bad operator’s mistakes can cost you too.
Price risk. A 4% reward paid in a token that drops 40% is still a big loss. Rewards are paid in the same volatile asset.
Lockups and liquidity. Many networks make you wait to unstake, so you may not be able to sell quickly. See our note on fees, emissions and lockups.
Platform and contract risk. Staking through an exchange or a liquid-staking contract adds counterparty and smart-contract risk on top of protocol risk. Our APY comparison that includes exit and contract risk explains how to factor this in.
Regulation. Wikipedia reports that the US SEC has argued staking rewards are similar to interest. In 2024, it approved Ethereum funds only on the condition that they did not stake. At that time, about 27% of all ether was staked, compared with 66% of Cardano and 63% of Solana.
Protocol-level attacks
Proof of stake has its own known weaknesses. These include “nothing-at-stake” incentives to validate every fork, long-range attacks that rewrite old history, and bribery of former large holders. Modern designs reduce these risks with penalties and with Byzantine-fault-tolerant finality, which works as long as no more than a third of validators are dishonest. That limit is worth knowing before you trust a small network.
A simple checklist
- Find out where the reward comes from: issuance, fees, or both.
- Check the unbonding period and any exit fees.
- Look up the operator’s slashing history.
- Compare the yield with the token’s recent volatility.
- Keep records of rewards, because tax treatment varies by country.
Crypto risk note: Crypto-assets are highly volatile and largely unprotected. You can lose all the money you put in. This article is general education, not financial, tax or legal advice. Never invest more than you can afford to lose.