Staking in cryptocurrencies is a way to participate in certain blockchain networks by locking or delegating digital assets to help validate transactions. In return, the user may receive rewards in cryptocurrencies, usually in the same asset they have staked.
Put simply, staking means putting your cryptocurrencies to work within a network that uses proof of stake. Instead of leaving them idle in a wallet, you lock or delegate them to contribute to the operation of the blockchain and receive possible rewards.
However, staking is not a savings account or a guaranteed return. Rewards can vary, the price of the asset may fall, there may be lock-up periods and, depending on how staking is done, there are also technical, platform or validator risks.
In this guide, we explain what staking in cryptocurrencies is, how it works and what you should consider before getting started.
What is staking in cryptocurrencies?
Staking is the process by which a user locks or delegates a certain amount of cryptocurrency in a blockchain network that uses proof of stake. This participation helps validate transactions, create new blocks and maintain the security of the network.
In return, the network may distribute rewards among those who participate in the process. These rewards usually come from the issuance of new tokens or from fees paid by users of the network.
The idea may seem similar to receiving interest, but it does not work like a bank deposit. In staking, there is no guaranteed return, there is no protection equivalent to a traditional deposit and the value of the cryptocurrency can rise or fall while it is locked.
What is proof of stake?
To understand staking, you first need to understand proof of stake, also known as PoS.
Proof of stake is a consensus mechanism. In other words, it is a system that allows a blockchain to decide which transactions are valid without relying on a central authority.
In networks such as Bitcoin, the mechanism used is proof of work, based on mining and computational power. In proof of stake networks, however, validators do not compete by solving calculations with specialized machines. Instead, they participate by locking a certain amount of cryptocurrency as collateral.
The larger the amount staked, the greater the probability of participating in block validation may be, although each network has its own rules.
How staking works
The basic functioning of staking can be summarized in five steps.
- First, the user acquires a cryptocurrency compatible with staking. Not all cryptocurrencies can be staked. Bitcoin, for example, does not work with staking because it uses proof of work mining.
- Second, the user locks or delegates their cryptocurrencies. Depending on the network, they can do this directly as a validator, by delegating to an existing validator or by using a platform that simplifies the process.
- Third, the network uses that participation to select validators. These validators help confirm transactions and add new blocks to the blockchain.
- Fourth, if the validator acts correctly, it receives rewards. If it behaves badly or breaks the rules, it may suffer penalties.
- Fifth, rewards are distributed among participants according to the rules of the network, the amount delegated, the validator’s commission and other factors.
Which cryptocurrencies allow staking?
Staking only exists in cryptocurrencies and networks that use proof of stake or similar variants.
Some well-known examples are Ethereum, Solana, Cardano, Polkadot, Avalanche and Cosmos. Each one has different rules: minimum amounts, unlocking periods, reward frequency, penalties and fees.
Before staking, it is important to review the specific conditions of the asset. It is not enough to look at the estimated annual percentage; you also need to understand how long funds may remain locked, what risks exist and how rewards are calculated.
Types of staking
Direct or solo staking
This consists of operating your own validator node. It is the option that offers the most control, but it also requires more technical knowledge, maintenance, a stable connection and, in some networks, a high minimum amount.
It is usually not the most suitable option for beginners.
Delegated staking
In delegated staking, the user keeps their assets but delegates their participation to a validator. The validator handles the technical side and distributes rewards among those who delegate, usually after deducting a commission.
This is a common option for users who want to participate without managing infrastructure.
Staking on platforms or exchanges
Some platforms allow users to stake from their account without setting up nodes or external wallets. The platform manages the technical side and makes access easier.
This option may be simpler, but it introduces platform risk. In other words, you depend on the platform correctly managing the assets, security and rewards.
Palzea presents Earn and staking features on its website, including “staking” to lock assets and obtain daily rewards, as well as an Earn section with flexible and fixed-term options.
Staking pools
A pool brings together funds from multiple users to increase joint participation. Rewards are distributed proportionally among participants, after possible fees are deducted.
Liquid staking
Liquid staking allows users to stake cryptocurrencies and receive a representative token in return, which can be used in other DeFi applications. It can provide more flexibility, but it also adds complexity and extra risks, such as smart contract failures or loss of parity of the derivative token.
Advantages of staking
The main advantage of staking is that it allows users to obtain possible rewards with cryptocurrencies they already own, without needing to sell them.
It also helps users participate in the operation of a blockchain network. Those who stake contribute to validating transactions and maintaining the security of the ecosystem.
Another advantage is that it does not require mining equipment. Unlike proof of work, staking does not require buying ASICs, setting up electrical installations or assuming the same energy costs.
In addition, on some platforms the process can be simple for beginners, since the user only has to choose the asset, review the conditions and confirm the operation.
Risks of staking
Staking also involves significant risks.
The first is market risk. Even if you receive rewards, the price of the cryptocurrency may fall. If the token falls more than the rewards obtained, the result in euros may be negative.
The second is lock-up risk. Some networks or products require funds to remain locked for a certain period. During that time, you may not be able to sell, withdraw or move your assets.
The third is slashing risk. In some networks, if a validator acts incorrectly, is disconnected for too long or breaks the rules, it may lose part of the staked funds.
The fourth is platform risk. If you stake through an exchange or third party, you depend on its security, solvency, operation and conditions.
The fifth is the variability of rewards. Staking rates can change depending on the network, the total amount staked, token inflation, fees and protocol activity.
That is why a high rate should not be interpreted as a guarantee. In crypto, a high reward is usually accompanied by higher risk.
Flexible staking vs locked staking
With flexible staking, the user can withdraw their funds more easily. In return, rewards are usually lower or variable.
With locked staking, assets are committed for a specific period. In some cases, this format may offer higher rewards, but it reduces liquidity. If the market falls during the lock-up period, you may not be able to react immediately.
Before choosing, it is advisable to review:
- Lock-up duration.
- Unlocking period.
- Estimated reward.
- Fees.
- Asset risks.
- Platform conditions.
Difference between staking, lending and yield farming
Although these terms are sometimes used as if they were the same, they are not.
Staking helps validate a proof of stake network. Rewards come from the operation of the protocol itself.
Lending consists of lending cryptocurrencies so that other users or protocols can use them. Rewards usually come from interest paid by borrowers.
Yield farming seeks returns in DeFi protocols by moving liquidity between different strategies. It can offer higher returns, but it also usually involves more complexity and risk.
For beginners, staking is usually easier to understand than many DeFi strategies, although it is still necessary to carefully review the risks.
How much can you earn with staking?
There is no fixed amount. Rewards depend on the network, the token, the total percentage of participation, validator fees, asset inflation and market conditions.
In addition, many platforms show estimates in APR or APY. APR indicates a simple annual rate. APY takes into account reinvestment or compounding of rewards, if applicable.
The important thing to remember is that an estimated return does not guarantee the final result. If the price of the asset falls, you can lose money even if you receive rewards.
How to start staking
The first step is to choose a cryptocurrency compatible with staking and understand how its network works.
Then, you must decide whether you want to do it directly from a wallet, delegate to a validator or use a platform that makes the process easier.
Before confirming, review the conditions: lock-up, fees, estimated reward, slashing risks, withdrawal policy and platform security.
On Palzea, the website shows staking within its Earn features and presents it as a way to lock assets to obtain rewards, along with management tools such as wallet, portfolio and 2FA security.
Tips before staking
- Do not stake only because a reward seems high.
- Research the project and understand what the token is used for.
- Check whether there is a lock-up or unlocking period.
- Check whether slashing risk exists.
- Start with small amounts if you are a beginner.
- Do not stake funds you may need in the short term.
- Diversify and avoid concentrating everything in a single asset.
- Read the platform conditions before confirming.
Conclusion
Staking in cryptocurrencies allows users to participate in proof of stake networks and obtain possible rewards for helping validate transactions. It is an alternative to mining in certain blockchains and can be useful for users who already plan to hold certain assets long term.
But it should not be confused with a risk-free investment. The price of the token may fall, rewards may change, funds may remain locked and there are technical or platform risks.
Before staking, it is advisable to understand the asset, review the conditions and assess whether it fits your risk profile.
At Palzea, you can explore features related to Earn, staking, wallet and portfolio from a single platform. Before using any yield product, always review the conditions, risks and availability of the service.
Frequently Asked Questions
What is staking in cryptocurrencies?
Staking consists of locking or delegating cryptocurrencies in a proof of stake network to help validate transactions and receive possible rewards.
Is staking safe?
Staking has risks. There may be price drops, lock-up periods, penalties, technical failures or platform risk if a third party is used.
Which cryptocurrencies allow staking?
Some well-known cryptocurrencies with staking are Ethereum, Solana, Cardano, Polkadot, Avalanche and Cosmos. Bitcoin does not allow staking because it uses proof of work.
Can I lose money by staking?
Yes. Even if you receive rewards, you can lose money if the price of the asset falls, if there are penalties or if the platform used has problems.
What is the difference between staking and mining?
Mining uses computational power to validate transactions in proof of work networks. Staking uses locked or delegated cryptocurrencies to validate proof of stake networks.
What is flexible staking?
It is a modality that allows funds to be withdrawn more easily than locked staking. It usually offers greater liquidity, although rewards may be lower or variable.