DeutschStaking is one of the most popular ways to generate passive income with cryptocurrencies. But what exactly is behind it, how does it work, and is it even still worth it? In this article, we explain everything you need to know about staking.
What is staking?
Staking refers to a process in which you support a crypto network by depositing coins. To do this, users can deposit their coin holdings in a wallet and thus achieve a return. In exchange for providing the coins, stakers receive rewards in the form of new tokens, comparable to interest on a savings account.
Staking is only possible on blockchains that use the Proof-of-Stake consensus mechanism. The staked coins serve as collateral that secures the network. Anyone who violates the network rules risks losing their staked coins.
How does cryptocurrency staking work?
The basic principle is simple: You deposit your coins in a network and in return, you become a validator or support a validator. Validators are the participants who check and confirm new transactions. In return, they receive rewards from transaction fees and newly created coins.
The selection of which validator is allowed to create the next block depends on several factors. The most important one: the amount of staked coins. The following motto usually applies: The more coins, the more rewards. Additionally, depending on the network, factors such as the duration of staking or random mechanisms play a role.
Rewards vary greatly depending on the network, the number of active validators, and network load. Specific return figures would be misleading here, as they change constantly.
Staking vs. Mining: The difference explained simply
To understand the concept of staking, it helps to compare it with mining. Both are mechanisms to validate transactions and add new blocks to the blockchain. However, the approach is fundamentally different.
Mining (Proof of Work): Proof of Work is a so-called trial-and-error process. This mechanism is used to find a consensus within the respective network and agree on an identical blockchain. In this process, miners in the ecosystem must prove that they are performing a certain amount of work. Crypto miners use their computing power to solve mathematical puzzles. If they are successful, they receive coin rewards. Bitcoin is the most well-known network based on Proof of Work. Quite a few experts criticize the high energy consumption and the resulting electricity costs.
Staking (Proof of Stake): In contrast to Proof of Work, Proof of Stake is based on proof of ownership. Blockchains based on Proof of Stake do not validate blocks through mining, but through staking. Validators are selected according to the number of their shares and receive rewards. Hardware and electricity costs are eliminated for the user.
The crucial difference: Mining requires expensive hardware and high electricity consumption. Staking only requires the ownership of coins and an internet connection. You can find out more about mining in our article on Bitcoin Mining.
Proof of Stake explained briefly
Proof of Stake (PoS) is the consensus mechanism that makes staking possible in the first place. Experts see the advantage of higher energy efficiency in the Proof-of-Stake mechanism. Instead of using computing power, participants use their own coins as collateral. The more coins a validator stakes, the more likely they are to be selected to create the next block.
If a validator acts incorrectly or maliciously (e.g., confirms double transactions), a portion of their staked coins can be confiscated. This punishment system is known as slashing and ensures that validators have a financial interest in acting honestly.
Ethereum completed the switch from Proof of Work to Proof of Stake in September 2022 (known as “The Merge”). This transition reduced the network’s energy consumption by over 99%.
Which cryptocurrencies use staking?
Staking is possible with numerous blockchains. The most well-known networks with a Proof-of-Stake mechanism are:
- Ethereum (ETH): The largest smart contract network. Completely switched to Proof of Stake since the 2022 Merge.
- Solana (SOL): Fast Layer-1 network with high throughput.
- Cardano (ADA): Scientifically grounded blockchain project.
- Polkadot (DOT): Interoperability platform with Nominated Proof of Stake.
- Avalanche (AVAX): Layer-1 blockchain with triple architecture.
- Cosmos (ATOM): Network for connecting independent blockchains.
- Tezos (XTZ): Blockchain with on-chain governance and “baking” mechanism.
Each network has its own rules for minimum amounts, lock-up periods, and reward structures. Specific returns change constantly and should be checked on the respective platform before staking.
How can you stake cryptocurrencies?
There are several ways to participate in staking. Which one is right for you depends on your technical know-how and the amount of coins you have. These are the most popular ways to stake cryptocurrencies:
Staking via crypto exchanges: The easiest way for beginners. More and more investors are using the straightforward offers from leading exchanges. With providers like Bitvavo or Bitpanda, you can stake your coins directly on the platform without any technical knowledge. The exchange handles the validator operation for you. In return, it keeps a portion of the staking rewards as a fee.
Staking Pools: There are various options for receiving rewards. Since the amount of shares is the primary factor here, many crypto owners form so-called staking pools. This is a community that pools its holdings to get more validations in the network. Payouts in this model are made on a percentage basis. These pools are excellent for meeting certain minimum requirements.
Own validator: The most technically demanding but also the most controlled way. You operate your own node and stake your coins directly in the network. This requires hardware, technical knowledge, and in many networks, a high minimum amount of coins (e.g., 32 ETH for Ethereum, 2,000 AVAX for Avalanche).
Liquid Staking: A newer variant where you stake your coins and receive a tradable token in return (e.g., stETH from Lido for Ethereum). This allows your staked coins to remain liquid and be used in DeFi applications at the same time.
What are the advantages of staking?
The advantages of the PoS mechanism and staking are obvious:
Passive income: Stakers receive regular rewards in the form of new coins without having to trade actively. The return varies depending on the network and market conditions.
Energy efficiency: Furthermore, the PoS mechanism is environmentally friendly and enables higher scalability. Hardware and electricity costs are eliminated for the user. Proof of Stake consumes only a fraction of the energy required by Proof of Work.
Network security: Through staking, participants actively contribute to the security and stability of the network. The more coins that are staked, the harder it becomes to attack the network.
Participation in governance: In many networks, stakers can vote on protocol changes and thus help shape the future of the project.
What are the risks of staking?
At first glance, staking seems like a risk-free way to earn money passively with cryptocurrencies. But staking is not risk-free. An overview of the most important risks:
Slashing: If a validator violates network rules (e.g., downtime, double signatures), a portion of the staked coins can be confiscated as a penalty. This risk primarily affects own validators but can also occur with staking pools.
Price risk: Staking rewards are paid out in the respective cryptocurrency. If the price falls during the staking period, the losses can exceed the gains from the rewards. A staking return of 5% per year is of little use if the coin loses 50% of its value in the same period.
Lock-up periods: In many networks, staked coins are locked for a certain period (e.g., 28 days for Polkadot). During this time, you cannot sell your coins. In a falling market, this can be problematic.
Platform risks: Anyone who stakes via a crypto exchange entrusts their coins to a third party. Should the exchange become insolvent or be hacked, the staked coins are at risk. The FTX crash in 2022 showed that this risk is real.
Inflation effect: Staking rewards partly come from newly created coins. This dilutes the supply. The “real” return (after deducting the inflation of the token supply) is therefore often lower than the displayed APY.
So you see that staking also has some risks. Therefore, it is particularly important to think about the right cryptocurrency and exchange before staking large amounts of coins.
Is staking still worth it?
Staking can still be a lucrative model today, depending on the coin and price development. However, there is no one-size-fits-all answer. It depends on several factors:
- Which coin are you staking? Networks with high usage and stable demand tend to offer more sustainable rewards than small, unknown projects with artificially high APYs.
- How long do you want to hold? Staking is primarily suitable for investors who intend to hold their coins long-term anyway. Those who trade short-term hardly benefit from staking rewards and risk missing selling opportunities due to lock-up periods.
- Which method are you using? Exchange staking is easy, but the return is lower. Operating your own validator offers more control and higher rewards but requires technical knowledge.
- Do you understand the risks? Price risk, slashing, and platform risks must be understood and factored in.
Staking and taxes
For investors in Switzerland, the following basic tax rules apply: Staking income is taxed as income and must be declared in the tax return. The staked coins themselves are subject to wealth tax and must be reported at their market value as of December 31. Different rules apply to Germany and Austria. You can find all the details in our article on cryptocurrency taxation in Switzerland.
Conclusion: Who is staking suitable for?
Staking is suitable for investors who want to hold their cryptocurrencies long-term and earn rewards on the side. For beginners, staking via regulated exchanges like Bitvavo or Bitpanda is the easiest way to start. Those who want more control and higher returns can operate their own validators or use liquid staking.
It is important not to underestimate the risks. Staking is not a risk-free savings account, but an investment in a crypto network with all the associated opportunities and dangers.
In our crypto exchange comparison, you will find the best platforms with staking offers.
Frequently asked questions about staking
- What is the return on staking?
The return varies greatly depending on the network, number of active validators, and market conditions. Typical values range between 2% and 15% APY. Note that part of the return is financed by the inflation of the token supply. The “real” return after deducting inflation is often lower.
- Which cryptocurrencies can you stake?
Staking is possible with all cryptocurrencies that are based on the proof-of-stake mechanism. The best-known are Ethereum (ETH), Solana (SOL), Cardano (ADA), Polkadot (DOT), Avalanche (AVAX), and Cosmos (ATOM).
- What is staking? A simple explanation
Staking means depositing cryptocurrencies into a blockchain network to validate transactions and secure the network. In return, you receive rewards in the form of new coins. It is comparable to interest on a savings account, but with significantly higher risks.
