Staking
Staking: Staking means locking up a proof of stake cryptocurrency to help secure its blockchain, and earning rewards in return. Validators put tokens at stake as a guarantee of honest behaviour, and can lose part of them if they break the rules. Investors can stake directly, through a pool, via a liquid staking token or on an exchange.
How staking works
On a proof of stake network such as Ethereum, validators are chosen to propose and confirm blocks in proportion to the tokens they have staked. Rewards come from newly issued tokens and transaction fees. Misbehaviour, or in some networks long downtime, can lead to a penalty called slashing.
Ways to stake
- Solo staking: running your own validator. On Ethereum this needs 32 ETH and reliable hardware.
- Pooled or liquid staking: you deposit any amount and receive a token that represents your staked position, which can usually be traded.
- Exchange staking: the platform stakes for you and holds custody of your tokens.
Risks to understand first
Staking rewards are not risk free. Token prices can fall by more than the reward earned, some networks have unbonding periods before you can withdraw, and liquid staking or exchange options add smart contract or platform risk. Always check who holds custody of the tokens.
Staking and tax in Australia
The ATO generally treats staking rewards as ordinary income at their market value when you receive them, with capital gains tax applying when you later dispose of the tokens. Keep records of every reward and speak to a registered tax agent about your own situation.
Frequently asked questions
Is staking the same as earning interest?
Not quite. Rewards come from the network for helping secure it, and the amount varies. Your principal is also exposed to price moves and protocol risk.
Can I stake Bitcoin?
Bitcoin uses proof of work, so it has no native staking. Products that offer Bitcoin yield rely on lending or other protocols with their own risks.
What is liquid staking?
Liquid staking gives you a token representing your staked coins, so you keep earning rewards while still being able to move or trade that token.