# Crypto Staking Explained

*Crypto staking lets long-term holders earn passive income by locking up their tokens, but it comes with risks like volatility and slashing penalties.*

**Author:** Jakub Lazurek
**Published:** 2024-11-06 13:00:56
**Source:** [View on Coinpaprika](/news/crypto-staking-explained/)

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**Cryptocurrency staking** is a popular [strategy](https://coinpaprika.com/news/hodl-the-crypto-strategy-of-holding-through-market-volatility/) for **earning passive income** by locking up digital tokens for a set period. Instead of traditional interest in dollars, **stakers earn a percentage of the staked crypto tokens**. However, it comes with risks and potential rewards. **Staking allows long-term holders** to gain more tokens without actively trading. It means **agreeing not to trade or sell your tokens**, and in return, the network **rewards you with more tokens**. This approach **diversifies a crypto portfolio** but involves risk, especially with volatile assets.

The **concept of staking** involves **locking up tokens** on a **blockchain network** to receive rewards. The staking process is typically linked to **proof-of-stake (PoS) blockchains**. For instance, if a network offers a 5% reward for staking 100 tokens for a month, **you would gain 5 additional tokens** at the end of the period.

There are **two main staking types**: **active** and **passive**. **Active staking** means **participating in network activities**, such as **validating transactions** and creating **new blocks**. This can offer higher rewards, but it requires more effort and knowledge. **Passive staking** simply involves **locking tokens** to support the network’s operations, generally **yielding lower returns** but requiring less involvement.

**Different staking models** have emerged in the crypto space. **Delegated staking** allows users to **delegate their tokens** to a validator node, **sharing the rewards** between the validator and the delegator. **Pool staking** involves a group of stakers **combining resources** to improve their chances of earning rewards, which are then **distributed proportionally**. **Exchange staking** lets users stake directly through a **crypto exchange**, which handles the process and **shares rewards**. **Liquid staking** provides **representative tokens** that can be traded or used, maintaining **liquidity** for the staker.

**Custodial and non-custodial staking** are two variations, based on where the tokens are stored. In **custodial staking**, users **transfer their tokens** to a platform. In contrast, **non-custodial staking** lets you keep control of your assets in your own wallet. This gives users more autonomy but also more responsibility for **security**.

For those interested in staking, the first step is to **choose a staking-compatible cryptocurrency**. Only certain tokens support staking, primarily those using **proof-of-stake** or similar mechanisms. Once you **acquire the tokens**, selecting a **reliable staking platform** is crucial. With tokens in place and a platform selected, you can then **lock up your assets** according to the platform’s protocol.

Earning rewards from staking isn’t guaranteed. **Network issues**, such as congestion, can cause delays. If a **validator node** acts maliciously or makes an error, **some or all tokens may be slashed**. Additionally, changes in the **blockchain’s protocol** can impact staking rewards.

The **benefits of staking** include the ability to **earn passive income** from long-term holdings and **contribute to network security**. The **rewards may appreciate** over time, potentially boosting the value of your holdings. Active staking can also provide opportunities to **participate in governance** and **decision-making** on the blockchain network.

However, **staking has drawbacks**. The **lack of liquidity** during the lockup period means stakers can’t access their funds if prices shift suddenly. There’s also the risk of **slashing penalties**, **market volatility**, and **network attacks**. Staking isn’t well regulated, adding uncertainty.

For **new stakers**, avoiding common mistakes is crucial. Some beginners **jump into staking** without understanding the **lockup periods**, making it impossible to access funds when needed. Others may **underestimate the impact of price volatility**, or **overestimate potential returns**. Failing to secure assets properly in **non-custodial staking** can lead to losses.

**Overcommitting to **[**staking**](https://coinpaprika.com/news/ethereum-staking-hits-record-highs/) can also be risky. It’s essential to **diversify holdings** rather than relying solely on staking for returns. Taxes on staking rewards are another often-overlooked factor. They can reduce overall returns, making it crucial to consider **tax implications** when staking.

In summary, **crypto staking** is a strategy for **generating passive income**, but it requires careful planning and risk management. As more **blockchains adopt proof-of-stake** models, staking will become more accessible, but understanding the **complexities and risks** involved is essential. Learning the ins and outs of staking is the first step toward **mastering this investment strategy**.

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**Tags:** Strategy, Staking

