What is cryptocurrency staking?
Staking is a mechanism for earning additional income where users lock cryptocurrency for a certain period and receive rewards.
Staking works on the basis of Proof of Stake (PoS), in which locked cryptocurrency is used to confirm transactions, for which rewards are paid. To put it as simply as possible, in the world of traditional finance staking most closely resembles a bank deposit or buying bonds.
However, it's important to understand that this is only a rough analogy. Staking works on different principles and carries risks specific to the cryptocurrency market.
Popular offers
| Token | APR/APY | Duration | Platform | Platform reliability | |
|---|---|---|---|---|---|
 ETH | 2.87% |  Bybit | 9 / 10 | ||
 BTC | 8.00% |  Mexc | 9 / 10 | ||
 USDC | 6.80% |  Binance | 10 / 10 |
How staking works
Staking operates in blockchain networks that support the Proof of Stake (PoS) mechanism — in it, network validators lock their coins and gain the right to take part in confirming transactions and creating new blocks in the network. For this they receive rewards.
If we draw an analogy with banks, you can imagine a large network that verifies and confirms all transfers around the clock. To support the network, participants are needed who confirm that all operations are carried out correctly. As a guarantee of their good faith, they temporarily lock their own crypto assets. For maintaining the reliability and stable operation of the network, they receive rewards.
Comparing staking with bank deposits
Staking is sometimes compared to a bank deposit because in both cases the investor locks their funds to receive regular passive income.
Similarities
- funds are locked for a certain period;
- percentage-based rewards are accrued;
- they are a form of passive income.
Key differences
- different mechanisms for earning rewards;
- no government insurance;
- the asset price can both rise and fall.
Staking can be considered a riskier instrument compared to classic banking products due to the lack of deposit insurance and the volatility of crypto assets.
Who receives the reward
Certain participants — validators — support the operation of the network. They verify and confirm transactions, form new blocks and keep the blockchain running. For this the network pays them rewards.
The role of a validator
Each network has specific conditions for participating in staking; for example, on the Ethereum network you need to lock 32 ETH, which is too large a sum for some, so there is an option to delegate your coins to a validator or invest coins in a shared staking pool.
The validator handles all the technical work related to participating in staking, while the cryptocurrency owner receives a share of the reward proportional to their stake.
For most users, delegation or participation in staking pools is the simplest way to take part in staking.
What the income depends on
Staking yield is stated as an annual rate — APR (without reinvestment) or APY (with reinvestment).
It is affected by:
- the rules of the specific blockchain;
- the number of network participants;
- the amount of locked funds;
- validator fees;
- overall network activity.
It's important to understand that the yield percentage is not fixed and can change depending on network conditions.
How to calculate staking income with irregular top-ups?
If top-ups happen irregularly or in varying amounts, the total balance can be treated as a sequence of several investments, each of which starts participating in staking at its own point in time. Each new amount only starts generating income from the moment it is added to the main balance.
There are several ways to calculate the final yield under such conditions.
Calculation example
Suppose 50,000 USDT are placed in staking on 13.01.2022 for a term of 12 months at 10% per year. The reward is accrued at the end of the staking term.
2 months after the start of staking, another 50,000 USDT will be added to the amount, and 3 months later — 20,000 USDT.
The first way
Split the staking term into three periods:
- for the first 2 months, 50,000 USDT take part in staking (until 13.03.2022);
- for the next 3 months — 100,000 USDT (from 13.03.2022 to 13.06.2022);
- for the last 7 months — 120,000 USDT (from 13.06.2022 to 13.01.2023).
Using the calculator, we get the income: 833 + 2,500 + 7,000 = 10,333 USDT.
The second way
Treat each top-up as a separate placement in staking, that is, as three independent staking positions:
- 50,000 USDT for 12 months;
- 50,000 USDT for 10 months;
- 20,000 USDT for 7 months.
Using the calculator, we get the same result: 5,000 + 4,167 + 1,167 = 10,334 USDT.
Frequently Asked Questions (FAQ)
Mining is characteristic of Proof of Work networks, where new blocks are created through the computational work of equipment. Staking applies to Proof of Stake networks: the right to confirm transactions is granted by locked cryptocurrency rather than device power. That's why staking usually doesn't require specialized hardware or large energy costs.
In many networks, after a withdrawal request the funds don't become available immediately but only after an unlocking period (unbonding). During this time the coins no longer earn a reward but are not yet available for transfer. The length of such a period depends on the specific network or platform and can range from several hours to several weeks.
Liquid staking is a format in which, in exchange for locked assets, the user receives a derivative token reflecting their share. Such a token can be used in other protocols while the principal amount remains in staking. This adds flexibility, but also additional risks related to smart contracts and the value of the derivative token.
The minimum threshold depends on the chosen method. Running a validator on your own often requires a large amount of assets, whereas delegation or staking through a platform is frequently available starting from small amounts. The specific minimum value is set by the network or service.
The frequency of accruals varies: some networks and platforms add the reward in every network cycle, others — once a day, a week, or at the end of a fixed term. The format and frequency of payouts are determined by the specific product.
The tax treatment depends on the user's jurisdiction and may change. In a number of countries the staking reward is treated as income. Compare-DeFi does not provide tax advice — if needed, you should clarify the requirements with relevant specialists.