Hot Wallet vs Cold Wallet: Which Do You Need?
Hot wallets are convenient; cold wallets are safer. How each works, the real risks, costs and a simple rule for splitting your crypto between them.
What Is Staking?
What crypto staking is, how proof-of-stake validators earn rewards, the main ways to stake from solo validators to exchanges, and the risks behind the yields.
Key takeaways
- Staking means locking up crypto to help secure a proof-of-stake network, in return for rewards.
- Rewards vary and are never guaranteed; the value of what you stake can still fall.
- Risks include lock-up periods, penalties, platform failure and smart-contract bugs.
On this page
Staking is often described as “earning interest on crypto.” That’s a misleading shortcut. When you stake, you lock up tokens to help run a blockchain, and the network pays rewards for that work. The rewards are real, but so are the risks.
How staking works
Proof-of-stake blockchains, such as Ethereum, don’t use energy-hungry mining. Instead, validators lock up, or stake, the network’s tokens as collateral. Validators take turns proposing and confirming blocks. Honest work earns rewards, paid in new tokens and transaction fees. Dishonest behaviour, or sometimes just being offline, can be penalised, and serious violations can lead to slashing, where part of the stake is destroyed.
Our guide to Ethereum explains how its switch to proof of stake worked.
Ways to stake
| Method | Who holds the keys | Typical minimum | Main risks |
|---|---|---|---|
| Solo validator | You | High, e.g. 32 ETH on Ethereum | Technical errors, slashing, hardware |
| Delegating | You, on networks that allow it | Low | Validator performance, lock-ups |
| Staking pools and liquid staking | A protocol | Low | Smart-contract bugs, token losing its peg |
| Exchange staking | The exchange | Low | Exchange failure, frozen withdrawals |
Liquid staking gives you a token representing your staked coins, which you can trade or use elsewhere. It adds flexibility, and another layer of risk: these tokens have traded below the value of the underlying coins during market stress.
Exchange staking is the simplest option, but you’re trusting the exchange with your coins. When crypto lenders and exchanges have collapsed, customers have faced long waits or losses. See our guide to exchanges vs wallets.
The risks behind the yield
- Price risk. A 4% reward means little if the token falls 40%.
- Lock-up and unbonding periods. Some networks make you wait days or weeks to withdraw.
- Penalties and slashing if a validator misbehaves or goes offline.
- Platform risk with exchanges and staking services.
- Smart-contract risk with pools and DeFi protocols.
- Regulatory risk. Regulators have taken different views of staking services, and some have been withdrawn in certain countries.
Staking and tax
In the US, staking rewards are generally treated as income when you gain control of them. In the UK, they’re often taxed as income, though the treatment can depend on the arrangement. Read our crypto tax basics and check official guidance.
Frequently asked questions
Is staking the same as lending?
No. Staking secures a network. Lending gives your coins to someone else, who promises to return them with interest, a different and often riskier arrangement.
Can I lose money staking?
Yes: through price falls, penalties, platform failures or smart-contract bugs. Rewards don’t protect you from any of these.
Can you stake bitcoin?
Bitcoin uses proof of work, not proof of stake, so it can’t be staked natively. Products offering “bitcoin staking” rely on other systems and carry extra risk.
Sources
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Keep reading
What Is a Stablecoin?
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Ethereum Explained Simply
Ethereum explained in plain English: what makes it different from Bitcoin, how smart contracts and gas fees work, the switch to proof of stake and key risks.