You may have heard that crypto has its own way of generating returns. Staking is one of the most common methods. Instead of trading or holding idle assets, staking lets you participate in blockchain validation and potentially earn passive income in the process. In this guide, we’ll explore how staking works with crypto, its benefits, and key risks to keep in mind.
The information presented here does not constitute financial advice but is for educational purposes only. Please do your own thorough research or consult a professional to better assess the risks of investing in cryptocurrencies.
Staking means locking up your crypto to help secure a blockchain network and potentially earning rewards in return.
It’s not always necessary to run a validator, and it’s possible to stake through an exchange or app that handles the whole process.
Only those cryptocurrencies built on a Proof of Stake (PoS) system, such as Ethereum (ETH), Solana (SOL), and Cardano (ADA), can be staked.
Like any investment, staking carries risks, including the chance of the coin losing value during a lock-up period.
Staking is a way to potentially earn rewards by putting your cryptocurrency to work on a blockchain network. When you stake your coins, you lock them up to help keep the network secure and running smoothly. In return, the network might reward you with additional tokens, similar to how you earn interest on cash savings.
The system behind staking is called Proof of Stake (PoS), and it is used by networks like Ethereum (ETH), Solana (SOL), and Cardano (ADA). There’s no energy-intensive mining involved. Instead, PoS lets participants, known as validators, confirm transactions by placing their crypto as collateral. Staking means the participants have a vested interest in the smooth running and security of a blockchain network.
Users can lock or delegate tokens within the network’s particular staking mechanism. In most staking models, you still own them throughout this process, but you may not be able to withdraw them until you choose to unstake or the lock-up period ends (if there is one).
What happens next depends on how you choose to stake. You don’t always have to become a validator yourself. A common option is to delegate crypto to a trusted validator or use a crypto exchange or app that manages the process for you. The network or platform sets a reward rate, and rewards are usually paid out in the same token.
Because staking on a PoS network doesn’t depend on heavy computation, it’s generally considered a more energy-efficient way to keep blockchains running smoothly compared to energy-intensive mining.
The participants, or validators, lock a certain amount of cryptocurrency in the network. The protocol then selects validators to add new blocks to the blockchain and verify transactions.
The selection process may involve random mechanisms. In some cases, the greater the amount of crypto staked, the higher the chances of being chosen to validate transactions and earn rewards. Another factor is how long the assets have been locked.
Validators who do this honestly earn a share of the network’s rewards. But if they try to cheat the system by, for example, double-signing blocks, they risk losing some of their staked tokens. Some networks also penalise prolonged inactivity. This built-in “slashing” penalty is designed to keep the network trustworthy and secure.
DPos is a variation of Proof of Stake. Instead of having every token holder validating transactions, holders vote for a small group of representatives called delegates or witnesses to do the work on their behalf.
Token holders stake coins to gain voting power, which is then used to elect the delegates. These delegates are responsible for confirming transactions and keeping the network running. The idea is to make blockchain validation faster and more efficient while still giving the wider community a say in how the network operates.
Blockchain networks that utilise DPoS include TRON (TRX) and Cardano (ADA).
There are several different staking options available, each one offering a different balance of ease, control, and liquidity.
Solo staking. The user runs their own validator node, which gives full control over the process but may require a significant minimum amount of crypto and strong technical expertise.
Delegated staking. Staking power is assigned to a third-party validator who does the technical work of running a node, and any returns are split between the user and the validator.
Exchange staking. Staked crypto is held on a centralised exchange, such as Bitpanda, and the platform handles everything for you, often charging a small commission before distributing rewards.
Staking pools. This combines the crypto of multiple holders in a pool to collectively meet validator requirements and compete for potential rewards.
Liquid staking. Crypto is staked through a protocol, and a representative token is issued in return that earns rewards but can still be traded or used.
When you stake crypto, there are two ways your assets can be held:
Custodial staking means depositing your crypto with a platform that holds the assets and manages the staking process on your behalf.
Non-custodial staking lets you keep control of your private keys and stake your coins directly from your own wallet.
Not all cryptocurrencies support staking. Only those built on a Proof of Stake consensus mechanism or a variant of it. Coins like Bitcoin (BTC) which uses Proof of Work (PoW), rely on mining instead and cannot be staked.
Here are some of the cryptocurrencies that can be staked:
Ethereum (ETH): Solo staking requires 32 ETH to run a validator node, but pooled options are often available through exchanges.
Solana (SOL): Uses a combination of Proof of Stake and a unique Proof of History mechanism, which timestamps transactions to coordinate the network efficiently.
Cardano (ADA): Uses the Ouroborus PoS protocol, allowing holders to delegate their ADA to a stake pool to participate in network validation without transferring ownership of their funds.
Polkadot (DOT): Acts as a bridge between different blockchains and allows them to share data, with DOT staking helping to secure this network.
Cosmos (ATOM): Often described as the “internet of blockchains”, Cosmos allows separate blockchain networks to communicate with each other.
Tezos (XTZ): Tezos uses a process called “baking” instead of traditional staking, and bakers can either bake directly or delegate their XTZ to an existing baker to participate without having to run a node.
By locking up assets to support a blockchain network, users might earn rewards. But like any investment, staking comes with risks worth understanding.
Potential benefits of staking
Potential to earn crypto rewards by holding and staking assets long-term
Staked crypto can help secure the blockchain
Staking uses less energy than Proof-of-Work mining
Some platforms let you reinvest rewards
Risks of staking
The value of your staked crypto – and any rewards – can fall as well as rise
During staking, funds may be temporarily unavailable
On some blockchains, validators who break network rules can lose a portion of their staked crypto, and delegators may be affected
Staking rewards may be taxable as income in the UK (Please note, tax treatment depends on individual circumstances and may change)
Crypto staking rewards are not guaranteed and may fluctuate depending on network conditions. You may receive less than expected or lose some or all of your staked assets.
Create or log into your Bitpanda account on desktop or through the mobile app
Deposit fiat to buy stakeable cryptocurrency
Enable multi-factor authentication (2FA) for account security
Go to the asset detail page or “Staking/Earn” section and select your crypto (e.g. ETH, ADA)
Choose the amount and click “Start Staking”
New to Bitpanda? Get started today!
Sign up hereAs blockchain technology matures, staking continues to grow in importance for securing networks. Staking has expanded into decentralised finance (DeFi), where users stake assets in liquidity pools to earn rewards while supporting network operations.
Several developments could further shape the future of staking, including cross-chain staking, where assets can be staked across multiple blockchains, and greater institutional adoption as the market matures.
Want to learn more about cryptocurrencies? In the Bitpanda Knowledge Hub, you’ll find a wide range of guides and tutorials explaining the basics, including how to start trading cryptocurrencies and all you need to know about crypto wallets.
We answer the most frequently asked questions about staking.
Disclaimer
Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
