Staking

A staking is the process of locking cryptocurrency (called a “stake”) in a proof-of-stake blockchain to participate in consensus and earn rewards. Stakers become validators and propose or attest to blocks. In return, they earn interest on their staked coins, typically 3–10% annually.

How staking works

1. Deposit collateral. A user deposits cryptocurrency (e.g., 32 ETH) into a smart contract.
2. Become a validator. The network registers the user as a validator, eligible to propose or attest to blocks.
3. Earn rewards. For honest participation, the validator earns rewards (newly issued coins + transaction fees).
4. Risk slashing. If the validator misbehaves, part or all of their stake is “slashed” (removed).
5. Withdraw. After an unbonding period, the validator can withdraw their stake plus accumulated rewards.

Staking yield

Staking yields vary by network and total staked amount:

• Ethereum: ~4–6% annually (2024), declining as more stake joins.
• Cardano: ~3–4% annually.
• Polkadot: ~10–15% annually.

Higher yields typically occur on networks with lower total stake (less competition for rewards). As staking becomes more popular, yields decline.

Comparison with traditional investments

Staking yield resembles traditional interest or bond yields, offering a passive income stream. However:

• No principal guarantee. Your stake can be slashed, unlike FDIC-insured deposits.
• Tax implications. Staking rewards are typically taxable income.
• Volatility. The underlying asset (e.g., ETH) can drop in price, offsetting staking rewards.

Risks: slashing

The key risk in staking is slashing — losing part or all of your collateral. This occurs if you:

• Propose two conflicting blocks.
• Vote for multiple incompatible chains simultaneously.
• Fail to participate when selected (minor penalty).

Slashing is automatic and enforced by the protocol. The risk of slashing keeps stakers honest and is what gives proof-of-stake its security guarantees.

Unbonding and withdrawal timing

When a staker wants to exit, they trigger an unbonding period:

• Ethereum: ~1 day to exit the validator set + ~27 hours to receive your withdrawal.
• Cardano: 1–3 epochs (~5–15 days).
• Polkadot: 28 days.

During this period, your stake remains at risk of slashing if you misbehave. Once withdrawn, you no longer earn rewards.

Liquid staking

Liquid staking services (like Lido, Rocket Pool) allow stakers to stake without running a validator and without locking funds. Users deposit cryptocurrency and receive a token (e.g., stETH) that:

• Earns staking rewards automatically.
• Can be traded, lent, or used in DeFi.

However, liquid staking introduces:

• Service risk. The staking service could fail or get hacked.
• Centralisation risk. Large liquid staking providers (Lido controls ~30% of Ethereum stake) concentrate staking power.
• Fees. Services take 5–10% of rewards.

Solo staking versus pooled staking

Solo staking: Running your own validator node. Requires technical skill, hardware, and ~32 ETH (on Ethereum). Benefits: full control, full rewards. Risks: responsible for your own security.

Pooled staking: Joining a liquid staking service. Benefits: no technical skill required, no lump capital requirement (can stake any amount), easier. Risks: service risk, centralisation, lower net rewards (after fees).

Staking as monetary policy

Some view staking as a form of monetary policy: validators are incentivised to participate, expanding the money supply through rewards. This differs from proof-of-work, where new coins are mined at a fixed rate regardless of participation.

Tax and regulatory considerations

In many jurisdictions, staking rewards are taxable income, even if they are not withdrawn. This can complicate tax reporting for stakers.

Some regulators treat staking as a security, raising questions about whether staking services are subject to securities regulations. This remains unsettled in many jurisdictions.

See also