What is staking?

Staking is one of the simplest ways to earn extra income with crypto. It works by locking your coins for a set period to help run and secure the blockchain network. In return, you earn regular rewards, similar to earning interest on a savings account.

More and more blockchains are adopting this principle because it offers a secure, energy-efficient and accessible alternative to mining. If you're just getting started with crypto and looking for additional returns, staking is a great way to actively participate in a network and put your coins to work.

• When staking, your cryptocurrencies remain in your possession. You lock them up in the network for a certain time and receive regular returns, known as staking rewards.

• Staking enhances the security and stability of the network. Your coins help confirm transactions and add new blocks to the blockchain, all without energy-intensive mining.

• Proof of Stake (PoS) makes staking possible. Instead of relying on computing power like mining, staking uses a selection process where active participants (validators) are chosen based on their staked coins.

• Many platforms, including Bitpanda, offer staking directly through their app or website. You don’t need any technical knowledge or your own hardware.

We’ve created this guide to explain everything important about staking, from the basics like Proof of Stake (PoS) and Delegated Proof of Stake (DPoS) to the risks and future prospects. Whether you're new to the world of cryptocurrencies or already experienced, you'll find answers to the most important questions about staking here.

What is staking?

When staking, you deposit your coins in a staking wallet and receive rewards in return, which are known as staking rewards. The coins you stake help secure the network by supporting transaction validation or providing liquidity.

Staking only works with cryptoassets that use the Proof of Stake (PoS) mechanism or a variation like Delegated Proof of Stake (DPoS). These systems rely on validators to verify and confirm transactions. To become a validator, you need to deposit a specific amount of the respective cryptoasset into your wallet. This qualifies participants to earn rewards for the assets they’ve staked.

Unlike the energy-intensive Proof of Work (PoW) model, where high-performance computers solve complex tasks, PoS and DPoS don't require powerful hardware. Instead, the system is based on staked coins and a randomised selection process for validators, making it far more energy-efficient and environmentally friendly.

Staking enables investors to earn returns by locking their coins. This process is similar to a savings account, where money earns interest as long as it remains deposited. The yield from staking depends on the amount of coins staked and the length of time they’re locked.

The staking process at a glance

The staking process begins once validators set up and secure their systems. This involves technical steps such as software installation and network security.

Once the set up is complete, the network uses an algorithm to randomly select validators to review new transactions and confirm blocks. This random selection is influenced by the amount and duration of coins staked.

Validators are incentivised to act honestly because they commit their own capital. Those who violate the rules risk losing their staked coins. This protection mechanism is known as slashing, which prevents manipulation and rewards responsible behaviour.

The technology behind staking

Staking relies on technical infrastructure called consensus mechanisms. These systems ensure that all participants agree on the current state of the blockchain. The most prominent mechanisms are Proof of Stake (PoS) and Delegated Proof of Stake (DPoS). Both avoid energy-intensive Bitcoin mining and allow users to actively participate in the network via staking.

Proof of Stake (PoS)

Proof of Stake (PoS) networks are considered a more environmentally friendly alternative to PoW because of their significantly lower energy consumption. In a PoS system, validators are chosen at random rather than based on computing power, but their chances increase based on the amount of coins staked and how long they’re locked up.

This method requires far less computational effort than mining. The result is greater fairness, better security and improved energy efficiency, all while reducing environmental impact.

In PoS networks, users can lock their tokens in a smart contract to become validators. These validators help keep the network available, up to date and secure from abuse. Typically, native tokens are staked, meaning they’re locked on the project’s blockchain. This approach is similar to a fixed-term deposit with a traditional bank, where users generate interest over time.

Delegated Proof of Stake (DPoS)

Delegated Proof of Stake (DPoS) takes the PoS process further by adding more democratic rules for selecting validators. This increases the chances that participants with fewer coins can still take part in block validation.

In DPoS, validators aren’t chosen directly by all coin holders. Instead, participants receive voting rights based on their staked coins, allowing them to elect representatives, called witnesses or delegates.

In this system:

• Witnesses are responsible for block validation.

Delegates supervise the network, monitor security, suggest upgrades and help manage governance.

Before you can start staking, you'll need to set up a suitable wallet. When staking, your coins are delegated, they stay in your wallet and aren't physically transferred. You retain full control while your coins support the network’s security.

You can either run your own validator node or use a platform to stake on your behalf. Alternatively, an easy way to start is by staking directly on Bitpanda.

Why does staking exist?

Because validators stake their crypto in the network and earn extra income by validating blocks, they’re naturally more interested in supporting the network. Their own capital is at stake, which encourages responsible behaviour and strengthens network integrity.

Staking is gaining importance across the crypto community, largely driven by user activity: more and more users want to earn returns on their crypto assets through DeFi platforms. These platforms are increasingly entering a space traditionally dominated by banks and central institutions.

Decentralised finance (DeFi) allows users to deposit their assets into liquidity pools, providing capital to others and generating income,  similar to interest payments from traditional banks.

Can all cryptocurrencies be staked?

Not all cryptocurrencies support staking. This feature is typically limited to those that use Proof of Stake (PoS) or similar consensus algorithms. Coins based on Proof of Work (PoW), such as Bitcoin (BTC), don’t support staking because block creation and transaction validation occur through mining.

Staking is implemented in various blockchain protocols to increase network security and reward users for their participation. Cryptocurrencies like Ethereum 2.0, Cardano and Tezos are well-known examples that support staking. Users can deposit their coins into a compatible staking wallet to join the block validation process and earn staking rewards.

Each blockchain project defines its own staking rules — including minimum staking amounts and lock-in periods. Staking pools make it easier for users with smaller holdings to participate and increase their chances of earning rewards. Staking not only secures the network but also fosters active community involvement.

Examples of cryptocurrencies that support staking

• With Ethereum 2.0, investors can stake Ethereum coins to help secure the network and earn rewards.

• Cardano (ADA) holders can stake their coins to support the network's integrity and receive ADA rewards, making it appealing for long-term investors.

• Tezos (XTZ) allows users to take part as “bakers”, contributing to the network’s security and development through staking.

• Polkadot (DOT) uses staking to support the security of its blockchain, which focuses on cross-chain interoperability.

• Algorand (ALGO) offers an efficient staking model based on its Pure Proof of Stake system, known for low entry barriers.

Want to explore more staking-enabled cryptocurrencies? Check out our full article on crypto staking.

Are there risks involved in staking?

Staking is an appealing way to earn returns with crypto, but it does carry risks. One key concern is the lock-in period. Staked coins can’t be traded during this time, meaning investors can’t respond quickly to market drops.

Security is also a major factor to consider. Users must trust that the staking platform is protected against hacks and theft. If a vulnerability is exploited, staked assets could be lost.

Another risk is slashing, where part of the staked coins can be forfeited if a validator breaks the rules. This incentivises proper behaviour but could lead to losses for those involved.

Taxation is also important. Income earned through staking may be taxable, with rules differing by country or region.

The future of staking in the crypto ecosystem

Staking is set for significant growth, as it's widely recognised as a sustainable alternative to traditional mining methods. Beyond its reduced environmental impact, staking offers higher speed, efficiency and scalability.

Staking is expected to become even more user-friendly and accessible to a wider group of investors. In particular, staking is likely to play a larger role in decentralised finance (DeFi), opening new earning opportunities for investors.

Innovations like cross-chain staking could boost flexibility, allowing users to stake assets across different blockchains. With clearer regulations and more stable frameworks, staking could become a mainstream investment method for both retail and institutional investors.

Frequently asked questions about staking

How secure is staking?

Staking security depends on several factors, including the reliability of the staking platform and the stability of the crypto network. While blockchain technology is generally secure, platforms used for staking can face vulnerabilities. Doing your research and using hardware wallets can help reduce risk.

Bitpanda Staking relies on cutting-edge security, offering a trusted platform that allows users to stake their assets safely and easily.

How is staking yield calculated?

The yield from staking depends on the amount of coins staked, the staking duration and the overall reward rate. Some platforms use Annual Percentage Yield (APY) to indicate the expected return over a year.

What are staking pools?

Staking pools are groups of crypto investors who combine their holdings to increase their chances of earning rewards. Individual users contribute coins to a shared pool, which acts as a larger stake in the network.

This improves the chances of being selected as a validator and earning rewards, which are then shared among pool participants.

What does APY mean in staking?

APY stands for Annual Percentage Yield, which is the effective annual return from staking expressed as a percentage. It includes compound interest from reinvested rewards.

What is a lock-in period?

A lock-in period in staking is the time during which your staked coins cannot be moved or sold. This helps maintain network security by ensuring a consistent supply of coins for transaction validation. Lock-in periods vary by cryptocurrency and staking protocol.

More topics around staking

Do you want to dive deeper into the subject? Then take a look at our further articles on the topic and find out what really matters in staking.

• Staking risks

• Getting started with crypto staking

• Staking rewards