What is crypto staking? A guide for investors

In recent years, the world of cryptocurrency has expanded beyond simple buying and selling. One of the more intriguing developments is crypto staking, a process that allows investors to earn rewards by participating in the operation of a blockchain network, but that also comes with risks.  

While many investors may not be interested in staking directly, understanding the opportunities and risks can be beneficial, especially when considering investment in exchange-traded products that may use staking to generate income for investors.

Crypto staking is a process used by certain blockchain networks to validate transactions and secure the network. When an investor stakes their cryptocurrency, they are essentially locking up their coins as collateral in a digital wallet to support the network’s operations. In return, they receive rewards, often in the form of additional coins.

The process is an integral part of the consensus mechanism known as Proof of Stake (PoS) used by blockchain networks such as Ethereum to validate transactions. This method is different from Proof of Work (PoW), which relies on computational power to solve complex mathematical problems and is used by crypto networks like Bitcoin.

Staking rules differ between blockchains, but users typically need to stake a certain minimum amount of cryptocurrency to potentially achieve a reward. Some blockchains allow users to delegate their cryptocurrency to a specialist who will stake for them in return for a fee. The more coins an investor stakes, the higher their chance of being selected to validate transactions and earn rewards.

Importantly, stakers can be penalized for computer downtime or making a mistake in the staking process. Validators may lose some or all of their staked coins if they break the network’s rules – for example, by signing conflicting blocks or votes. This system helps discourage misconduct and protect the integrity of the network.

For investors, staking is crucial for a number of reasons. Among them:

• It can offer investors a way to potentially earn income. Staked cryptocurrency can achieve both the potential return of the currency plus the staking reward. In some ways, this makes staked crypto like a foreign-currency-denominated bond. 
• Staking may also provide a more energy-efficient alternative to mining, which is the backbone of PoW systems like Bitcoin. By reducing the need for extensive computational power, PoS and staking may contribute to a more sustainable blockchain ecosystem.

For investors who may not be interested in the technicalities of staking themselves, crypto exchange-traded products (ETPs) that incorporate staking may be attractive. These products allow investors to gain exposure to staking rewards without the need to manage the process directly.

While staking can offer attractive potential returns, it is not without risks.

• Staking often requires locking up coins for a certain period, which can limit liquidity.
• Additionally, most cryptocurrencies – whether staked or not – tend to be highly volatile, impacting overall return potential.
• Investors should also be aware of the potential for network-specific risks, such as changes in the staking protocol or security vulnerabilities.
• Staking rewards are often paid with newly minted cryptocurrency. Higher staking rewards might indicate that the supply of a cryptocurrency is increasing faster than other cryptocurrencies and potentially diluting the share of the network – and thus the value of the tokens – owned by holders that do not choose to stake. 
• Concentration risk is significant for the Ethereum platform. Almost 30% of its cryptocurrency, Ether, is deposited in the “staking contract” (a smart contract that secures funds used to validate network transactions and earn rewards) and, as of March 2025, the next 60 addresses owned around 18% of the total Ether supply. If there is an issue with that contract, it could have an outsized impact on the price of Ether. For the other top accounts, if several of those users decide to sell, it could also have an outsized effect on the price of Ether.

Crypto staking represents a significant evolution in the cryptocurrency landscape, offering a more sustainable and potentially rewarding way to participate in blockchain networks. However, it also can come with risks that investors need to consider. For those interested in the benefits of staking without the complexities of managing it themselves, ETPs that incorporate staking can provide a viable approach.

As with any investment, it is essential to conduct thorough research and consider the associated risks and rewards.

CRC# 5512136 (05/2026)