What Is Staking? The Deal Behind the Rewards

On 12 April 2023, Ethereum shipped an upgrade called Shapella, and for the first time the people securing the network could take their staked coins back out. Some of that money had been locked since December 2020, nearly two and a half years, no exit, just a promise that withdrawals would arrive eventually. When the door finally opened, some queued straight out, and more arrived behind them: by late 2023 there was more ETH staked than on the day the exit opened.

That is staking in one scene: coins locked as collateral to help run a chain, rewards paid for the trouble, and exit terms that matter more than anyone admits. This guide is a plain walkthrough, not financial advice.

The deal you are actually signing

A proof-of-stake chain needs people to put money where their mouth is. A validator locks the chain's own coin as collateral, does the work of checking and voting on blocks, and earns rewards paid from new coin issuance plus a share of transaction fees. Misbehave, or let your machine misbehave, and the chain destroys part of the locked stake, a penalty called slashing.

How proof of stake chooses who writes the next block is a separate story, and our proof-of-work versus proof-of-stake guide covers it. This piece is about the deal itself: your coins stand hostage for your behaviour, and the reward is rent on the hostage.

The seat price varies wildly: Ethereum wants at least 32 ETH per validator, a six-figure sum in pounds at 2025's peaks, so most holders join staking pools instead and split the rewards, minus the operator's cut. Other chains skip the hardware question entirely and let you point your coins at someone else's validator straight from your own wallet.

Getting out is the fine print

Nobody reads exit terms in a bull market. Read them anyway.

Ethereum's early stakers took the deal blind: the beacon chain went live in December 2020 and accepted deposits with no withdrawal mechanism at all. The way out only arrived with Shapella, on 12 April 2023. Even now an exiting validator waits in a queue, and the queue stretches whenever a crowd heads for the door at once.

Polkadot writes the wait into the rules instead. Its nominated proof of stake has you back validators with your DOT, and leaving starts a 28-day unbonding period. For those 28 days the coins earn nothing and cannot move. If the price halves on day three, you watch. The chain slows exits on purpose, for its own security, but the risk of the wait still sits with you. And if a validator you backed cheats, nominators share the slashing.

Cardano skipped the lock entirely

Cardano went the other way when its Shelley upgrade switched staking on in July 2020. Staking there is delegation: you point your ADA at a stake pool from your own wallet, and the coins never leave it. No lock-up, no unbonding queue: spend the lot on a Tuesday if you like, and delegators cannot be slashed.

Rewards drip in every five-day epoch, after a first wait of 15 to 20 days while the snapshots catch up. But the rewards land in ADA, a coin that moves, and pool choice still matters: an oversaturated or badly run pool pays thinner rewards for the same coins.

Receipt tokens and other workarounds

Liquid staking tries to have it both ways. You hand coins to a protocol, it stakes them, and it gives you a receipt token to trade while the real coins stay locked, Lido's stETH being the best-known receipt.

The small print: a receipt is not the coin. It trades at whatever the market will pay, and on bad days that is less than the thing it represents. Through mid-2022, around the lender Celsius freezing customer withdrawals that June, stETH changed hands below ETH for weeks. Anyone who needed out right then took the discount.

'Liquid' has a price.

Custodial staking is the lazier route: an exchange or platform stakes for you and keeps a slice of the rewards. Less to set up, but also one more party who can fail, freeze withdrawals or lose the keys, which turns a chain-risk product into a chain-plus-counterparty-risk product.

What the yield is actually paying you for

Headline staking rates on the major chains sit in the low-to-mid single digits, and they drift as participation changes: the more coins staked, the thinner each share. Any number you see is a snapshot, not a promise.

And the unit matters more than the rate. Rewards are paid in the coin you staked, a volatile asset, so the yield can be up while the position is down. One rough month can cost more than a year of rewards pays. A percentage quoted without that caveat is a sales pitch.

Slashing is rarer, and it does not just catch villains. In February 2021 the staking firm Staked had around 75 Ethereum validators slashed in a single incident, after a redundancy setup accidentally double-signed. Honest operators, bad configuration, burnt stake.

So the ledger you are being paid to carry looks like this:

• Slashing, including honest mistakes, wherever you run or back a validator.

• Lock-ups and unbonding windows you cannot trade out of.

• Receipt tokens that can slip below the coins they stand for.

• Platform failure, whenever someone else holds the coins.

Every reward exists because at least one of those risks is live. When a rate looks far richer than its peers, ask which risk just got bigger, and what all that new issuance does to the coin's supply.

Starting, and what to check first

Own the coin first. An on-ramp handles the money-to-crypto step: Banxa has run that plumbing since 2014, with more than 100 payment methods across 100-plus countries, where available. Coins land in your wallet, and staking is a separate decision you make from there.

Then match the method to your patience: delegation on Cardano carries the loosest exit terms, pools and receipt tokens open Ethereum to smaller holders and add operator or discount risk, and custodial staking means reading who holds the keys before you read the rate. Whatever you pick, find the exit terms before you enter, not mid-emergency. Tax treatment of staking rewards varies by country and sits outside this guide.

Staking pays for patience. If the coins are money you might want back next month, the yield is probably not paying you enough to find out.