What Is Crypto Staking? How It Works and What the Risks Are
Staking means locking up crypto to help run a network in exchange for rewards. It sounds like a "crypto savings account," but it carries far more risk. Here's how it works and what can go wrong.
What it is
On Proof of Stake blockchains, transactions are confirmed by validators who lock up coins as collateral. You can "delegate" your coins to them and receive a share of the rewards. That's staking.
Where people stake
| Where | Pros | Cons |
|---|---|---|
| On an exchange | Simple, just a few clicks | The exchange controls the coins |
| Through a wallet | You hold the keys | More complex, requires care |
| In DeFi protocols | Flexibility | Risk of hacks and scams |
Risks
- The coin's price falls. This is the main risk: rewards are paid in coins, and if the coin loses value, you're down in money terms.
- Lockups. You often can't withdraw your coins right away; unstaking takes days or weeks. You won't be able to sell during a drop.
- Validator penalties for breaking the rules.
- Platform risk. The exchange or protocol can go bankrupt or get hacked.
- Scams. "Staking" with very high rates is a common disguise for Ponzi schemes.
Staking is not a bank deposit and isn't covered by insurance. How to spot a Ponzi scheme disguised as an income product is covered in the article signs of a Ponzi scheme and the lesson how to avoid scams.
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- Staking means locking coins in exchange for rewards.
- The main risks are a falling coin price and locked withdrawals.
- Promises of high rates are a warning sign.
Frequently Asked Questions
Is staking like a bank deposit?
No. A deposit is held in the deposit's currency and is often insured. With staking, rewards are paid in coins whose price can fall sharply, and there's no insurance.
Can I take my coins out of staking at any time?
It depends on the coin and the platform. There's often an unbonding period during which the coins can't be sold.
Which coins can be staked?
Only coins on Proof of Stake blockchains and their derivatives. Bitcoin can't be staked in the classic sense because it runs on Proof of Work.
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