The Proof of Stake (PoS) algorithm, by introducing staking as a means to enhance blockchain security and functionality, offers an eco-friendly solution that also conserves energy.
Staking is a form of passive income generation from cryptocurrency assets where block information is verified and validated without the need for mining systems.
However, like any other type of investment, this method also comes with risks such as Price Volatility Risk.
What Is Staking?
Staking refers to the process in which users earn rewards by holding or locking their digital assets within a blockchain network.
By staking assets on blockchains that operate under the Proof of Stake (PoS) algorithm, individuals contribute to the security and efficiency of that network.
This process is similar to earning interest by depositing funds in a traditional bank account.
Crypto staking does not require advanced technical skills, and anyone with basic knowledge can enter this space.
Networks such as Solana (SOL), Cardano (ADA), and Ethereum (ETH) are among the projects that offer cryptocurrency staking options.
What Is the Proof of Stake (PoS) Algorithm?
The Proof of Stake (PoS) algorithm is a method for verifying blockchain transactions and creating new blocks.
Instead of using mining devices, users stake a portion of their cryptocurrency and, in return, receive rewards for generating new blocks.
The locking of users’ assets within the blockchain increases the credibility of that blockchain.
Advantages and Risks of Staking
While crypto staking offers passive income for investors, it also comes with risks such as Price Volatility Risk.
Benefits of Staking
Staking cryptocurrencies not only generates income but also contributes to energy efficiency and improved environmental conditions.
- Earning Rewards: Similar to earning interest in a bank, staking allows users to receive periodic returns;
- Enhancing Network Security: Participating in the transaction validation process improves the stability and security of the network;
- Eco-Friendly: Unlike PoW, the PoS algorithm does not require heavy hardware resources and is environmentally sustainable;
- Energy Efficiency: Energy consumption and related costs are significantly lower compared to mining;
- Passive Income Generation: One can earn profits without daily activity or constant trading;
- Wide Accessibility: Many exchanges (such as ByBit,CoinBase, Binance) and wallets offer crypto staking.
Risks of Staking
Staking involves risks such as Price Volatility Risk or project failure. Key risks of cryptocurrency staking include:
- Lock-Up Period: During this time, users cannot sell or transfer their cryptocurrency;
- Price Volatility Risk: The value of the asset may decline during the staking period;
- Validator Selection Risk: Choosing an unreliable validator may result in partial loss of funds;
- Unstaking Period: After stopping staking, users might need to wait before their assets become withdrawable;
- Project Failure Risk: If the project fails, there's a possibility of losing the staked funds.
What Is a Staking Pool?
The chance of successfully validating a block is directly related to the amount of cryptocurrency locked in the network; the higher the amount, the better the chances of being selected to validate a block.
Given the large number of validators and their substantial holdings, small investors typically have a low probability of receiving block rewards.
Staking pools allow smaller crypto stakers to combine their assets with others, increasing their chances of being chosen for block validation.
Consequently, the reward for validating a block is distributed among participants based on each staker’s contribution to the pool.
Different Methods of Staking
To stake cryptocurrencies, users can either connect directly to the blockchain or use intermediaries such as staking pools.
Direct Connection to the Blockchain
In this method, the staker becomes a validator within the network and plays a direct role in the block validation process. To do this, a certain amount of the network’s native cryptocurrency must be locked directly on the blockchain.
Once the asset is locked, a computer must remain continuously online to stay connected to the blockchain and validate blocks.
This method typically yields higher rewards than other crypto staking methods, but it requires significant capital, advanced blockchain knowledge, and technical setup.
If any issue or disruption occurs in the validator’s block validation process, a portion of the locked funds may be penalized and deducted.
Using an Intermediary to Connect to the Blockchain
In this method, users connect to a validator’s liquidity pool and do not participate directly in the block validation process. This is a fully passive investment strategy that does not require advanced blockchain knowledge.
One simply locks their funds into a staking platform; naturally, the reward received from this approach is lower compared to direct connection to the blockchain.
There are various methods for connecting to a staking intermediary, each offering different levels of rewards.
Locked Staking
In this method, the staker connects to a validator’s liquidity pool and locks a certain amount of cryptocurrency in a wallet or exchange for a predetermined period.
The lock-up duration is set in advance, and if the user cancels participation before the agreed time, the locked asset is released with a penalty deduction.
Cold Staking
In this method, the asset is locked in a cold wallet that is not connected to the internet, and the staker retains control over the private keys.
By signing a smart contract, the staker delegates the use of their digital asset for block validation to a validator, while still holding the asset in their cold wallet.
If the asset is removed from the cold wallet, the reward distribution stops. Afterward, the accumulated rewards from the locked asset will be paid to the staker.
Flexible Staking
In this approach, the asset is held in an exchange or wallet without being locked.
There is no penalty for early withdrawal, which makes this method more convenient, though it offers lower rewards compared to other crypto staking methods.
Liquid Staking
In this method, after the selected asset is locked, the staker receives a derivative token with the same name as the locked token, prefixed with "ST", representing the same value and quantity.
This token retains all functionalities of the original locked token, allowing the staker to trade it freely.
After initiating liquid staking, whenever the staker decides to end the process, they must return the derivative token in order to retrieve their original asset. After this step, the derivative token is burned.
Staking on Centralized Exchanges
In this method, the staker deposits their asset into a centralized exchange (CEX) and leaves the rest of the staking process to the platform.
This approach requires no technical knowledge of blockchain. However, the selected exchange must be validated, and its staking rewards should be reviewed carefully.
Restaking
The concept of restaking is defined within Ethereum’s consensus layer. This mechanism, through its own protocols, enables locked tokens to be reactivated.
Restaking allows the crypto staker to use their tokens across multiple networks to enhance network security and increase rewards.
Top restaking protocols include:
- Renzo
- Etherfi
- EigenLayer
Steps to start staking
To begin staking and become a Staker, it is essential to first choose a staking method based on one’s individual investment strategy.
Steps to perform staking:
- Choose a cryptocurrency based on your staking method;
- Install a wallet and transfer the selected crypto;
- Sign a smart contract and begin staking.
#1 Choosing the Right Cryptocurrency for Staking
To choose a cryptocurrency, the investment goal must first be defined.
If the objective is to earn passive income by staking an asset alongside long-term holding profits, the long-term trend of that asset should be analyzed to avoid Price Volatility Risk.
To eliminate the risk of Price Volatility Risk, it is recommended to use stablecoins for staking, as their value is always pegged to 1 USD.
#2 Installing a Wallet and Transferring Your Cryptocurrency
In this step, the wallet setup and preparation process is completed:
- Preparing the wallet for staking;
- Downloading a trusted wallet from platforms such as App Store or Google Play;
- Creating a user account within the wallet;
- Setting up security measures such as two-factor authentication (2FA);
- Transferring your selected cryptocurrency to the wallet.
#3 Signing a Smart Contract and Starting the Staking Process
Next, access the DApp section of your wallet to locate the staking platform and connect your wallet to it.
At this point, the chosen amount of cryptocurrency is locked, and with the signing of a smart contract, the staking process officially begins.
Key Considerations for Staking Cryptocurrency
Before starting staking, several factors must be reviewed — such as platform credibility, fees, and the duration of the smart contract — to minimize investment risks as much as possible.
Important crypto staking considerations include:
- Evaluating Platform Credibility: The reputation and track record of a staking platform should be assessed through expert reviews and user feedback;
- Reviewing Minimum Lock-Up Period to Earn Rewards: This duration can vary from a few days to several months and should be considered based on the investor’s goals;
- Staking Costs: It’s essential to estimate costs such as transfer fees, custody fees, and staking service charges;
- Analyzing Smart Contract Instructions: Some smart contracts may include hidden clauses beyond staking instructions; reading the underlying code can help identify them;
- Staking Rewards: Staking platforms offer different reward percentages depending on the cryptocurrency and lock-up duration;
- Analyzing the Cryptocurrency: To avoidPrice Volatility Risk, the long-term trend of the chosen asset should be examined using both technical and fundamental analysis.
Does impermanent loss occur in staking?
No, contrary to popular belief, this does not happen in staking.
Impermanent loss is specific to liquidity providers in decentralized exchange (DEX) pools. Therefore, during periods of high price volatility in one of the paired tokens locked in the liquidity pool, the DEX initiates a buy or sell operation on the highly volatile token to maintain balance within the trading pair. As a result, the loss incurred from these automated trades is referred to as impermanent loss.
Best Cryptocurrencies for Staking
Only cryptocurrencies that use the Proof of Stake (PoS) algorithm are eligible for staking.
Cryptocurrencies offer different annual percentage yields (APY), depending on the nature of each project. Here’s a list of the best cryptocurrencies for staking in 2025:
Cryptocurrency Name | Percentage Yield (APY) |
Ethereum (ETH) | 4% |
Avalanche (AVAX) | 7% |
Binance Coin (BNB) | 2% |
Aptos | 7% |
Matic | 4% |
Polkadot (DOT) | 11% |
Cardano (ADA) | 3% |
Tron (TRX) | 5% |
Cosmos | 20% |
Algorand (ALGO) | 11% |
Solana (SOL) | 8% |
HyperLiquid (HYPE) | 2% |
Conclusion
Proof of Stake (PoS) allows users to earn cryptocurrency by staking instead of mining. Staking involves locking a portion of a blockchain’s native token to help secure and operate the network. In return, stakers receive token rewards.
There are two main staking methods: direct staking, which requires expertise and high capital, and indirect staking, where users participate via intermediaries through options like Locked Staking, Cold Staking, and Liquid Staking.
