Crypto Staking 101: A Popular Way to Earn Passive Income

14 MIN

Staking allows crypto holders to put their cryptocurrencies to work and earn passive income without selling their digital assets. Read on to learn how crypto staking works.

Start Trading on 3Commas Today

Get full access to all 3Commas trading tools with free trial period

Staking is a term you'll hear a lot as a cryptocurrency investor. Crypto staking is a process through which many cryptocurrencies verify their transactions and allows participants earn passive income on their cryptos.

Cryptocurrencies that execute their transactions via the proof-of-stake model can be staked. Unlike the proof-of-work mechanism, the proof-of-stake model uses less power.

Some cryptocurrencies have very high-interest rates for staking, making it a great way to earn passive income. It is important to understand how crypto staking works before getting started. That is what this article will achieve.

What is Crypto Staking?

Crypto staking involves temporarily locking cryptocurrencies for a predetermined period to support a blockchain’s operation. It allows participants to earn more cryptocurrency.

The proof-of-stake consensus model is widely used by blockchains. Those who wish to "stake" cryptocurrency to validate transactions and add new blocks to the blockchain are required to do so under this system.

The practice of staking aids in the verification of transactions and data to be added to a blockchain. Staking is a type of insurance in which people lock up amounts of cryptocurrency in exchange for the chance to validate new transactions.

They risk losing all or part of their investment if they make an error validating potentially fraudulent data. However, they receive more cryptocurrency rewards for validating correct, legitimate transactions and data.

How Does Crypto Staking Work?

As stated earlier, staking is possible through the proof-of-stake consensus model. This is a method that allows some blockchains to choose honest nodes and make sure that new blocks of data are added to the network.

The process discourages dishonest practices in the network by making it costly for validators, (also called "stakers"), to acquire and hold a predetermined number of tokens. If anyone corrupts the blockchain via any malicious activity, the value of its native token would go down, costing the person or people who did it money.

Validators are incentivized with rewards in the native cryptocurrency for their commitment. The more one stakes, the higher the chance they have to propose a new block and earn more rewards.

The stake does not need to contain just one person’s cryptocurrencies. In most cases, validators coordinate a staking pool to gather funds from token holders via delegation, thereby lowering the entry barrier and making it easier for more people to take part in staking. Anyone who owns crypto can take part in staking and earn rewards for participating in verifying blockchain transactions through the delegation of their cryptocurrencies to stake pool operators.

To maintain order, validators can be punished for even minor issues, such as going offline for an extended period, by being removed from the consensus process and having their funds frozen or lost. The latter refers to "slashing," and it has occurred on a few blockchains, like Ethereum and Polkadot.

Cryptocurrencies You Can Stake

Solana (SOL)

The Solana (SOL) blockchain-based smart contract platform is designed for deploying dApps (decentralized applications). Its native token, SOL, can be used to execute on-chain transactions and settle network fees.

Those who contribute to the Solana network as validators or delegated stakers are eligible to receive staking rewards. The Solana network relies on its validators, who handle transactions and maintenance. SOL holders that give their SOL tokens to stake pool operators in exchange for staking rewards are known as delegated stakers.

If you're a validator, you're responsible for keeping a validation node (also known as a "cluster") online and running at peak performance. Slashing is a feature of Solana and occurs when validators are either malicious or perform poorly. Validators can charge delegators commission fees to help cover the cost associated with running a cluster.

Cardano (ADA)

Cardano (ADA) is a "third-generation" blockchain platform that aims to facilitate the creation and execution of smart contracts. Cardano's native currency, ADA, is used for rewarding network security and facilitating transactions on the network.

Cardano's staking system allows users to earn passive income by delegating stakes and running a stake pool. Staking pools let people with ADA delegate their ADA without having to run a node or use special hardware.

Stake pool operators are responsible for managing all aspects of a stake pool. Individuals who can reliably operate a network node are essential to the safety of the network as a whole. Since the chances of being chosen as a "slot leader" increase with the total amount of ADA staked, the Cardano network employs game theory to determine which stake pool will create the next block on the chain.

When a pool is chosen as slot leader and validates a transaction block, it receives a reward, which is then split among stake delegators.

Polkadot (DOT)

Polkadot is a blockchain interoperability protocol that links multiple chains into a single network. This lets different chains process transactions and shares data at the same time. DOT, the native token of Polkadot, is primarily used for governance, staking, and connecting to new "parachains."

With Polkadot's nominated proof-of-stake (NPoS) consensus algorithm, users can choose between validating transactions on the network and watching the behavior of validators to earn staking rewards.

Slashing also occurs on this blockchain when a validator does something malicious. When such occurs, both the validator and the person who nominated them to lose their staked DOT.

How Can You Start Staking?

Crypto staking can seem complicated at first but it’s quite easy once you get the hang of it. The following is a step-by-step guide for staking cryptocurrency:

Buy crypto that uses the proof-of-stake model 

Not all cryptocurrencies can be staked; you'll need one that uses proof of stake to validate transactions.

You should start by researching the various proof-of-stake cryptocurrencies you're interested in to learn more about how they work, their stake rewards, and their staking processes. Once you understand these, you can then search for the crypto you want and buy it on cryptocurrency exchanges and apps.

Transfer the cryptocurrency to a blockchain wallet

A cryptocurrency can be staked on the same exchange where it was bought, as some exchanges offer their staking programs for certain coins.

Blockchain wallets, also known as crypto wallets, are widely regarded as the most secure places to keep cryptocurrencies. The quickest way to get a wallet is to use a free software wallet, but you can also buy hardware wallets

Select the cryptocurrency you wish to deposit into your wallet and click the "Generate Wallet Address" button. Paste this address into your exchange account, and your crypto will be transferred from the exchange to your wallet.

Join a staking pool

Most cryptocurrencies use staking pools where crypto traders pool their resources to increase their chances of earning staking rewards. Once you've found a pool, all you have to do to start earning rewards is stake your cryptocurrency to it through your wallet.

Before joining a staking pool, you need to consider the pool’s APY, rewards, risks, and lock-in period.

What is Proof of Stake?

Proof of stake is a process through which many cryptocurrencies verify transactions. Cryptocurrencies use this method to verify transactions since they are decentralized and not controlled by a financial institution.

In proof of stake, crypto holders stake their coins in exchange for the right to verify and add new blocks of transactions to the blockchain. It is an alternative way for validating cryptocurrency transactions. It is also an energy-efficient alternative to proof-of-work, which is the first consensus mechanism that was developed for cryptocurrencies.

Joining a Staking Pool

Joining a staking pool that is run by another user is an alternative to giving your staking decisions to an exchange. You'll need to understand how crypto wallets work and how you can connect them to the validator's pool before you can do this.

It is important to consider a validator’s track record before joining a staking pool. You can see if a pool operator has been fined in the past for mistakes or malicious acts. Some even detail their terms and conditions protecting participants that delegate tokens, among other details like the commissions or fees. 

You should also choose an established pool. However, you might not want to go for the biggest pool. Since blockchains are meant to be decentralized, there is no need for a single group to have too much influence.

Risks of Crypto Staking 

Liquidity Risk

If you stake a micro-cap altcoin with low exchange liquidity, it may be hard to sell your asset or trade your staking returns for bitcoin or stablecoins. Liquidity risk can be reduced by staking assets with high trading volumes on exchanges.

Market Risk

When participants stake their cryptocurrencies, they risk a decline in the price of the asset or assets staked.

For instance, if you stake an asset and earn 20% APY, but its value drops by 60% over the year, you will end up losing money.

Therefore, cryptocurrency investors should not base their staking asset decisions solely on annual percentage yield (APY) figures but rather on a variety of other factors.

Validator Costs

In addition to the risks that come with running a validator node or giving staking to a third-party service, staking cryptocurrency costs money.

Staking with a third-party provider usually costs a few percentage points of the staked rewards, while running your validator node will cost you money for hardware and electricity.


If you don't take appropriate precautions, you could lose access to your wallet's private keys or have your funds stolen.

Regularly back up your wallet and keep your private keys in a secure location, whether you are staking or "hoarding" your digital assets.

Staking with apps (where you have control of the private keys) is better than staking with services that hold your private keys for you.

How Profitable is Staking?

The main benefit of staking is to earn passive income. Hence, crypto staking is a profitable way of investing money. The interest rates can be quite high; in some cases, they can be more than 10% or 20% per year.

Why Can’t You Stake All Cryptocurrencies?

Not all cryptocurrencies can be staked. Only cryptocurrencies that use the proof-of-stake model can be staked. Many cryptos use the proof-of-work model to add blocks to their blockchains, which has the drawback that it requires a lot of computing power.

When You Should or Shouldn’t Stake Cryptocurrency 

If you have cryptocurrency that you can stake but don't intend to trade it anytime soon, you should stake it. Staking requires no effort on your part, and you'll earn more cryptocurrency as a result.

What should you do if you do not have any crypto to stake at the moment? Considering the gains that staking can offer, it's worth finding cryptocurrencies that can be staked. This is possible with a lot of cryptocurrencies, but make sure to check if each one is a good investment before buying it.

The proof-of-stake consensus model is not only beneficial to crypto investors, but also to cryptocurrencies. Cryptocurrencies can use proof-of-stake to validate large volumes of transactions at low costs. Since you now have a good knowledge of what staking entails, you can start researching cryptocurrencies that can be staked.

Crypto Staking FAQ

  • If you already own some cryptocurrency, you can use it to validate other people's transactions on the blockchain network and earn more cryptocurrency in the process. Hence, staking can be a means through which crypto holders can earn passive income.

  • The decision to stake your cryptocurrency may be determined by your confidence in its long-term value. For instance, If you trust the Ethereum network, the daily fluctuations in price may not force you to sell.

  • Crypto staking involves temporarily locking up cryptocurrency to receive rewards or earn interest as a form of passive income. This is made possible by blockchain technology, which verifies cryptographic transactions and stores the resulting data.