What is staking?

Think of a deposit someone puts down to take on a job: if they follow the rules, they get paid for taking part; if they break them, they can lose part of the deposit. That’s roughly how staking works on Proof of Stake networks.

Validators run the necessary software and take part in checking transactions and adding new blocks to the blockchain. The coins they lock up serve as a financial guarantee for their behavior. Rewards may come from new coins issued by the network and from transaction fees, depending on its rules.

You don’t always need to run your own validator. On some networks you can delegate your stake to a validator without handing over control of your coins. There are also exchange services and liquid staking protocols, where you receive a token that represents your stake. Each option has different terms and risks.

Why it matters

Staking helps the network run without a central party approving transactions. For crypto holders, it offers the potential to earn rewards from this participation. It isn’t a bank deposit or guaranteed interest.

If, for example, your coins increase through rewards but their price falls further, their total value in euros can go down. We consider it essential to separate an increase in the number of coins from your actual financial return.

What to watch out for

Unstaking may involve a waiting period, so you may not be able to move your coins right away. Some networks apply slashing, a cut of the deposit, for specific validator violations. Depending on the network, operational problems can also reduce rewards or bring penalties.

Going through a third-party provider adds the risk of a hack or of the provider being unable to return your money. Liquid staking carries additional risks from smart contracts and from the price of the representative token drifting from the value of the underlying coins.

Finally, a “staking” label doesn’t guarantee you’re supporting a Proof of Stake network. Some services use the term for lending or other reward mechanisms. The question is always the same: where does the yield come from and who controls the coins?