Staking: What It Is and How It Works

How staking works

In a proof-of-stake blockchain, the right to propose and confirm blocks is given to validators who have locked ("staked") the network's token as collateral. The protocol picks a validator to propose each block, weighted by stake, and other validators vote (attest) that the block is valid.

The design turns honesty into the profitable choice:

• Rewards. Validators that do their job receive newly issued tokens and a share of transaction fees. On most networks, delegators share in those rewards after the validator's commission.
• Penalties. Validators that go offline miss rewards. Validators that provably cheat, for example by signing two conflicting blocks, are slashed: part of the stake is destroyed and the validator is ejected.

Because an attacker would need to acquire and risk a large share of all staked tokens, rewriting the chain becomes expensive in the network's own currency.

On Ethereum, a solo validator deposits 32 ETH into the deposit contract and runs consensus and execution software around the clock. The Pectra upgrade (7 May 2025) raised the maximum effective balance per validator to 2,048 ETH, allowing large operators to consolidate validators, while 32 ETH remains the minimum. Other chains, such as Solana and Cardano, let holders delegate tokens to a validator without transferring custody.

Ways to stake

Liquid staking protocols such as Lido pool deposits and give back a token (for example stETH) that represents the staked position plus rewards. That token can be used elsewhere in DeFi, which is convenient but stacks additional risks. Restaking, popularized by EigenLayer, goes a step further by reusing staked ETH to secure other services, in exchange for extra rewards and extra slashing conditions.

An example flow (hypothetical, no rates): a user deposits ETH into a liquid-staking protocol such as Lido and receives stETH, whose balance rises as staking rewards accrue. They can post part of the stETH as collateral in a lending market such as Aave to borrow a stablecoin. That keeps the position liquid, but it stacks risks: stETH can trade below ETH, the loan can be liquidated if prices move, and each protocol adds its own smart-contract risk. Rocket Pool (rETH) offers a similar liquid-staking receipt, and exchanges such as Coinbase and Kraken offer custodial one-click staking.

Unbonding: on many networks, unstaking starts a waiting period of days to weeks before tokens become transferable again, and on Ethereum withdrawals pass through an exit queue.

A short history

Proof of stake was first used by Peercoin, which mixed it with proof of work, and then by fully proof-of-stake networks such as Nxt. Many later chains, including Cosmos, Tezos, Cardano, Polkadot and Solana, launched with staking built in.

The largest change came from Ethereum. Its proof-of-stake Beacon Chain went live in December 2020, but staked ETH could not be withdrawn yet. The Merge on 15 September 2022 made proof of stake the consensus mechanism for Ethereum itself, and the Shapella upgrade on 12 April 2023 finally enabled withdrawals, making staking reversible.

Liquid staking took off after the Beacon Chain launch, and by the 2024–2025 period a single liquid-staking protocol, Lido, held a large share of all staked ETH, which prompted debate about concentration. Restaking protocols such as EigenLayer then added a new category in which staked ETH is reused to secure other services.

Where staking rewards come from

Staking rewards are not interest paid by a borrower. They come from:

1. New issuance created by the protocol, which dilutes holders who do not stake;
2. Transaction fees and tips paid by users;
3. On some chains, MEV (see maximal extractable value), extra value from ordering transactions in a block.

That is why a quoted reward rate, usually shown as APY, changes with network activity and with how much of the supply is staked: the more tokens staked, the smaller each staker's share. Rates quoted by a provider are after its commission and are not guaranteed. A reward paid in a token that falls in price can still mean a loss in dollar terms.

Risks of staking

• Slashing: validator misbehaviour, including accidental double-signing from a bad setup, can destroy part of the stake.
• Lock-up and unbonding: many networks impose a waiting period before staked tokens can be withdrawn; during that time you cannot sell.
• Custodial risk: with exchange staking or some providers, a third party controls the keys.
• Smart-contract and depeg risk: liquid staking tokens can trade below the value of the underlying stake, and contract bugs can cause losses.
• Price risk: rewards do not protect against a fall in the token's price.
• Tax and regulation: treatment of staking rewards differs by country, and some jurisdictions restrict exchange staking products.

This is general information, not a recommendation to stake any asset.

Staking vs mining vs yield farming

• Staking vs mining: both secure a blockchain and earn block rewards. Mining uses computing power and electricity (proof of work); staking uses locked tokens.
• Staking vs yield farming: staking secures a base-layer network. Yield farming means supplying tokens to DeFi applications such as lending markets or liquidity pools for incentives, with different risks such as impermanent loss.