What Is Crypto Staking And How Does It Work

What Is Crypto Staking
Here's how crypto staking works and helps you earn rewards.

Crypto staking is a pivotal concept in cryptocurrency and involves participants actively supporting a blockchain network’s operations and security. Unlike traditional investments, where assets are held passively, staking requires participants to lock up a certain amount of cryptocurrency as collateral, demonstrating their commitment to the network’s stability.

In return, stakers can earn rewards akin to making interest on an investment. This method contrasts with more conventional investment strategies, offering a dynamic way for individuals to engage with and contribute to blockchain ecosystems while reaping the benefits of potential financial gains.

Proof-Of-Stake (PoS) Mechanism

Proof-of-Stake (PoS) is a consensus mechanism employed by blockchain networks to validate transactions and secure the network. Unlike Proof-of-Work (PoW), where miners compete to solve complex mathematical puzzles, PoS relies on participants’ ownership (‘stake’) of the native cryptocurrency.

In PoS, nodes and validators are essential in maintaining the network’s integrity and consensus. Nodes are computers that store and keep a copy of the blockchain’s transaction history. They validate transactions by checking their cryptographic signatures, contributing to network security and transparency. 

On the other hand, validators are a specific subset of nodes, propose new blocks of transactions and validate the correctness of transactions within those blocks. They are incentivised to behave honestly and follow the rules of the network. If a validator acts dishonestly, they can lose their staked cryptocurrency.

Difference Between PoS And PoW

PoS differs significantly from PoW as follows:

Aspect Proof-of-Work (PoW)Proof-of-Stake (PoS)
Resource intensiveRequires substantial computational power and energy consumptionEnergy-efficient and prevents resource-intensive competition
Validator selectionMiners compete to solve puzzles and add blocksValidators are chosen based on their staked assets
DecentralisationMight face centralisation concerns as mining pools growPromotes broader participation for decentralisation
SecurityHigh security due to computational effortValidators' economic stake deters malicious behaviour

Choosing And Using Staking Cryptocurrencies

Staking is a popular model in cryptocurrencies like Ethereum 2.0, Cardano (ADA), Polkadot (DOT), and Tezos (XTZ), where participants can earn rewards by validating transactions.

Steps To Get Started With Staking

By following these steps, you can engage in staking and earn rewards by supporting the security and operations of PoS-based blockchain networks.

Purchasing A Cryptocurrency That Uses PoS

Begin by acquiring a PoS-compatible cryptocurrency through an exchange. Ensure it supports staking for the coin you intend to stake.

Transferring The Purchased Crypto To A Blockchain Wallet

Move your purchased crypto from the exchange to a compatible blockchain wallet. Ensure the wallet supports crypto staking and provides a user-friendly interface. 

Joining A Staking Pool To Increase Rewards

To enhance rewards and simplify the process, consider joining a staking pool. Pools combine participants’ stakes, increasing the chances of earning rewards. Research and choose a reputable staking pool that aligns with your goals.

Different Staking Options

Staking in the cryptocurrency world offers several options for users to participate in network validation and earn rewards. Solo-staking involves individuals locking their tokens to validate transactions and earn rewards directly. 

In contrast, staking pools provide collaborative platforms where participants combine their cryptocurrency holdings to increase their chances of earning rewards. In a staking pool, participants contribute their stakes, and the pool collectively validates transactions. 

Rewards generated are distributed among pool members based on their contributions, offering a more predictable and consistent income than solo staking.

Factors to Consider When Choosing A Staking Pool

A few factors to consider when choosing a staking pool are:

  • Reliability: Opt for well-established pools with a track record of consistent payouts and reliable operations.
  • Fees: Consider the pool’s fee structure – lower fees enhance your overall returns.
  • Pool size: Balance pool size. Larger pools may offer more frequent rewards, but smaller pools contribute to network decentralisation.
  • Network support: Choose pools that support the specific cryptocurrency you want to stake.
  • Staking directly on exchanges: Many cryptocurrency exchanges offer staking services, allowing users to stake their holdings directly on the platform. While convenient, this option may have limitations compared to dedicated staking pools, such as potential withdrawal restrictions and fewer customisable options.

Ultimately, your choice of staking option depends on your goals, preferences, and risk tolerance. Active participation can lead to rewards while supporting the underlying blockchain network, whether you opt for staking pools or exchange-based staking. 

Staking has evolved to include the option of staking directly on exchanges. It allows users to delegate their tokens to exchanges, simplifying the staking process by leveraging the exchange’s infrastructure. While convenient, it’s essential to consider potential centralisation risks and trust in the exchange’s operations.

Methods Of Staking

Staking On Exchange

Many exchanges offer staking services, allowing users to stake their cryptocurrencies directly on the platform. Through these services, users can delegate their tokens to the exchange, using them to participate in the staking process on various blockchain networks. In return, users receive a portion of the staking rewards generated by the network. 

Binance, Coinbase, and Kraken are prominent exchanges with crypto staking programs enabling users to participate without investing in complex setups. However, the regulatory landscape surrounding staking services on exchanges is still evolving. Regulatory authorities are scrutinising staking services, requiring exchanges to ensure compliance with changing rules to safeguard users’ assets.

Blockchain Staking

Users can stake directly on blockchain networks using decentralised wallets that interact with the network. By directly engaging in staking, users contribute to blockchain security and consensus. 

To uphold the security of the blockchain, choosing a reliable validator becomes crucial in this process. Validators are responsible for validating transactions and maintaining network integrity. When selecting a validator, performance and reputation are vital factors.

Liquid Staking Derivatives

Liquid staking derivatives are financial instruments that enable users to unlock liquidity from their staked cryptocurrency assets. These derivatives strike a balance between the locked nature of staked tokens and the need for accessible funds. 

They represent staked tokens as tradable assets, enabling users to trade, lend, or borrow against their staked positions.

Risks And Considerations

Liquid staking introduces risks that users should carefully assess before participating:

  • The derivatives rely on smart contracts, exposing users to vulnerabilities and hacks.
  • Liquid staking relies on the underlying staking protocol’s security and functionality.
  • Users may incur losses due to price fluctuations when providing liquidity or participating in yield farming with these derivatives.

DeFi Applications

Decentralised Finance (DeFi) platforms are innovating by facilitating liquid crypto staking, providing users more flexibility in managing staked assets. This means that users can earn staking rewards without locking up their tokens for a certain period. Several DeFi applications facilitate liquid staking. Some of the most popular include:

  • Lido is a liquid staking protocol that allows users to stake ETH and receive stETH (staked ETH) tokens in return. stETH can be used in various DeFi applications, such as lending and borrowing, yield farming, and trading.
  • Ankr is another liquid staking protocol that supports a variety of tokens, including ETH, SOL, DOT, and AVAX. Ankr users can earn staking rewards and participate in Ankr’s staking delegation program, which rewards users for delegating their staked tokens to Ankr’s validators.
  • Staked is a liquid staking protocol that allows users to stake various tokens, including ETH, BTC, ADA, and ALGO. Staked users can earn staking rewards and also participate in Staked’s liquidity mining program, which rewards users for providing liquidity to Staked’s lending and borrowing markets.

Understanding Staking Rewards

Staking rewards are a product of the cryptocurrency staking process, where users lock their tokens to support a blockchain network’s operations. Stakers play a pivotal role by validating transactions individually or contributing to a crypto staking pool, pooling resources for a better chance at rewards. 

The relationship between the staking amount and validation likelihood is crucial, as higher stakes increase the probability of being chosen as a validator, reinforcing the network’s security commitment.

Multiple variables influence the potential reward rates. Network attributes, such as consensus mechanism and transaction volume, impact the rewards available. Inflation and the total amount of tokens staked also contribute to rate fluctuations. Stakers who join pools should consider pool-specific dynamics. 

Moreover, network upgrades and the level of staker participation further influence reward rates. A thorough comprehension of these factors empowers speakers to fine-tune their strategies, maximising potential rewards while actively engaging in and supporting the blockchain ecosystem.

Safety And Risks

Though staking is a lucrative opportunity, it has risks.

Staking carries risks tied to validator behaviour, like downtime and security breaches, potentially causing financial loss. Validators’ misbehaviour or non-compliance with network rules can lead to slashing.

Slashing, a penalty mechanism, penalises malicious validators. If a validator engages in activities that violate network rules, such as double-signing transactions or failing to validate correctly, they can face penalties. Slashing involves confiscating a portion of the validator’s staked tokens, serving as both a financial penalty and a deterrent to prevent misconduct.

Therefore, researching and selecting reputable validators is crucial to mitigate these risks to ensure security and reliability. By conducting due diligence and choosing validators judiciously, stakers can minimise the chances of falling victim to malicious actors or experiencing slashing events.


Exploring crypto staking opportunities can be financially rewarding and intellectually enriching in the dynamic world of crypto. However, the profits calculated from staking crypto are subjected to taxation in certain countries like the UK, Australia, the USA and India, and it can become tedious to calculate such taxes manually. 

However, you can use KoinX, an automated crypto-tax software that categorises your crypto transactions by their nature and then calculates the taxes based on the same.


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