What is Staking Cryptocurrency and How To Make Money with Staking

Introduction to Staking

Today you'll learn what cryptocurrency staking is and why it matters—especially for investors.

We'll break down the concept of proof of stake: what it actually means, how it works behind the scenes, and the key mechanisms that drive it. Understanding these fundamentals is essential for anyone investing in this space.

If you own a proof-of-stake cryptocurrency, staking can earn you rewards. As an investor, that’s something you’ll likely want to take advantage of.

We’ll walk you through everything you need to know.

What Is Staking and Why It Matters

So, why would anyone stake their cryptocurrency—and what does that actually mean?

Put simply, staking allows you to earn a yield on your holdings. If you're an investor, your goal is to generate returns. Staking offers a way to do that passively, with potential yields ranging from 2% to 10%, depending on the asset and the network. It's a straightforward way to put your crypto to work and earn passive income over time.

Staking vs. Bitcoin Mining

You can stake most cryptocurrencies to earn a yield—except for one: Bitcoin.

Bitcoin operates differently. It runs on a proof-of-work system, which means you can’t stake it in the traditional sense. Instead, if you want to earn a return from Bitcoin, you’ll need to mine it. That involves investing in specialized hardware known as ASICs, setting them up to solve complex computations, and consuming significant amounts of electricity in the process.

It's a more involved and resource-intensive approach, but it's the only way to generate new Bitcoin and earn rewards directly from the network.

These, on the other hand, are proof-of-stake cryptocurrencies.

Unlike Bitcoin, they don't require mining or expensive hardware to earn a return. Instead, the yield comes from actively participating in the network by staking your coins. That means you simply invest your holdings into the protocol, and in return, you receive rewards—no mining rigs, no high energy costs, just passive income through participation.

How Proof-of-Stake Works

That’s the key difference between a proof-of-stake cryptocurrency and a proof-of-work cryptocurrency like Bitcoin.

In proof-of-stake systems, staking rewards serve a critical purpose—they help maintain the security and functionality of the network. Just as miners are incentivized through rewards in Bitcoin’s proof-of-work model, validators in proof-of-stake networks are compensated for securing the blockchain.

While the mechanisms differ, both systems ultimately aim to achieve the same goal: keeping the network decentralized, stable, and secure.

Bitcoin Mining Process Explained

When you make a Bitcoin transaction, you’re sending your BTC to the network. That transaction is first picked up by a node, which verifies its validity. Once confirmed, it's grouped with other transactions and passed along to the mining network.

Miners—who are spread across the globe—then compete to solve a complex cryptographic puzzle. This process, which consumes significant energy, involves hashing numbers until one miner finds the correct solution. The winner of this “race” gets rewarded with newly minted Bitcoin.

Afterward, the block of verified transactions is added to the blockchain, and the process repeats for the next set of transactions. This cycle is what keeps the Bitcoin network running and secure.

How Staking Works in Cardano

Miners in the Bitcoin network use energy-intensive computing to secure the blockchain, and in return, they’re rewarded in BTC. Proof-of-stake cryptocurrencies, however, operate differently.

In a proof-of-stake system like Cardano, there are no miners. Instead, the security and validation of the network rely on the coins held by investors. Here’s how it works: as a Cardano holder, you can delegate your ADA tokens to a node—known as a stake pool. This stake pool is essentially a collective of funds from multiple investors.

The pool operator is responsible for validating transactions and maintaining the network. They're incentivized to do so efficiently, as they earn a fee from the staking rewards. Meanwhile, investors receive a yield—typically around 4%—paid out in ADA tokens. It’s a model that secures the network through economic participation, not computing power.

Incentive Structure in Proof-of-Stake

Let’s say a stake pool operator takes a 5% fee from the total amount of ADA staked by investors. That fee becomes their compensation for maintaining the node.

Now, why are staking rewards even necessary? Simple—because no one is going to run a node for free. You can’t expect someone to manage a computer in their home or basement, keep it online 24/7, and process transactions without any return. Just like Bitcoin miners are rewarded with BTC for their work, proof-of-stake networks offer incentives to those who help secure and operate the system.

In proof-of-stake, the rewards structure is split: investors earn a return on their staked coins—say, 4% annually in ADA—and the node operator earns a fee for managing the infrastructure. It’s a built-in reward system that ensures the network remains decentralized, functional, and secure.

Staking as a Reward System

Staking is essentially a reward system designed to incentivize participants to help operate and secure a blockchain network over time.

At its core, it allows investors to delegate their coins to trusted network operators—those responsible for validating transactions and maintaining the system’s integrity. In return, both parties benefit: investors earn a share of the rewards for staking their assets, while the node operators receive a portion for doing the actual work of keeping the network up and running smoothly.

As long as those operators perform their role effectively, they continue to earn their cut, and the network remains secure and functional.

Slashing and Security

There’s also a built-in downside for node operators who fail to do their job properly.

When an investor delegates their coins to a node, they're essentially placing trust in that operator to act responsibly. If the operator performs poorly—or worse, behaves maliciously—the staked funds can be slashed. That means a portion of the coins is taken away as a penalty.

Slashing is designed to deter bad behavior, such as submitting invalid transactions or attempting to disrupt the network. In contrast, when a node runs efficiently and honestly, it earns rewards, investors receive their staking returns, and the network remains stable and secure.

It’s a system of balanced incentives: rewards for good behavior, consequences for misconduct.

Where Staking Rewards Come From

It all sounds promising—but where exactly do staking rewards come from, and how are they paid?

You can't simply create coins out of thin air and hand them out indefinitely. For a cryptocurrency to maintain real value, there needs to be scarcity. If the supply keeps growing without limit, the currency becomes inflated, and its value erodes over time.

This is the problem we see with fiat currencies like the U.S. dollar. The government prints more money to meet economic demands, but the trade-off is inflation—more dollars in circulation means each one buys less. Over time, this can lead to a slow decline in purchasing power and, in extreme cases, a collapse in value.

In crypto, that's exactly what you want to avoid. For a system to remain functional and sustainable, the issuance of rewards must be controlled. Most proof-of-stake networks address this by setting fixed or declining emission schedules, capping total supply, or redistributing transaction fees. The idea is to reward participation without undermining the long-term value of the asset.

Take Cardano as an example. If ADA pays out 3% in annual rewards to stakers, that’s a solid incentive for participation—but it also means the total supply of ADA is increasing by 3% each year.

Now, here’s the catch: if every investor receives 3% more ADA, but the overall value of the project doesn’t grow, then no one is actually wealthier. Everyone just owns more coins that are worth proportionally less.

You can think of it like this: imagine a piggy bank that holds $1,000, and there are two investors who each own one share—so it’s a 50/50 split, $500 in value each. Now let’s say they’re each given an additional share. They now have two shares apiece, but the piggy bank still only holds $1,000. Despite having more shares, their value remains exactly the same—$500 each.

This illustrates the issue with unchecked inflation in crypto. Increasing the number of coins without increasing the actual value of the project leads to dilution. More coins doesn’t mean more value—it just means each coin is worth less.

This is what’s commonly referred to as inflation.

Put simply, staking rewards have to come from somewhere—they can’t just be endlessly printed without consequence. If a network continually issues new tokens to pay out rewards, it risks devaluing the currency over time.

That’s why, for a staking system to be sustainable, a significant portion of the yields should come from a healthy, functioning ecosystem—one that generates consistent revenue. In most cases, this means transaction fees.

A network that produces real economic activity can fund rewards through the fees it collects, rather than relying solely on inflation. This creates a more balanced model where staking incentives are supported by actual network usage and demand, not just by expanding the supply.

Inflation and Long-Term Value

In these early stages of development, much of the staking rewards distributed by blockchain networks come from inflation—that is, the creation of new tokens.

Take Cardano as an example. In its initial phase, the protocol offers relatively high staking rewards, which are funded by increasing the total supply of ADA. This is by design. The goal is to incentivize participation and help bootstrap the network.

However, this inflation isn’t meant to last forever. Over time, the rate of new coin issuance gradually decreases. In Cardano’s case, the inflation rate is set to decline until it approaches near-zero levels.

Importantly, Cardano—like many other well-structured cryptocurrencies—has a fixed supply cap. That means there’s a hard limit to how many tokens will ever exist, which introduces scarcity and long-term value preservation into the system.

You can verify this by checking a platform like CoinGecko. For instance, Cardano has a maximum supply of 45 billion ADA, with approximately 33.8 billion already in circulation.

Eventually, that cap will be reached—no more new coins will be minted. At that point, staking rewards will no longer be funded by inflation or newly created tokens.

Instead, yields will need to come entirely from within the ecosystem itself—primarily through transaction fees and other forms of network activity. This shift is fundamental to the long-term sustainability of any proof-of-stake network.

Examples of Supply Caps and Fee Models

Many cryptocurrency projects have long-term strategies to ensure sustainability by transitioning staking rewards away from token issuance and toward fee-based systems.

Take Ethereum, for example. Instead of relying solely on inflation to pay rewards, Ethereum incorporates a burn mechanism that permanently removes a portion of transaction fees from circulation. This helps offset new issuance and can even reduce the total supply over time.

Cardano, as mentioned earlier, is capped at 45 billion ADA. Binance Coin (BNB) is limited to a maximum supply of 168 million. Polygon’s MATIC is capped at 10 billion coins, while Aave has a total maximum supply of just 16 million tokens.

These supply limits, combined with mechanisms like fee-based rewards and token burns, are designed to protect long-term value and maintain the economic integrity of their respective ecosystems.

Token Emissions vs. Fee-Based Rewards

Staking rewards can initially be funded through token issuance. For instance, if Polygon (MATIC) has a total supply of 10 billion tokens but only 5 billion are currently in circulation, the remaining 5 billion can be gradually released as rewards to incentivize early participation in the network.

This approach helps attract users, encourage staking, and secure the blockchain in its early stages.

However, once the full supply is in circulation and no additional tokens can be minted, the model changes. At that point, staking rewards must be generated exclusively from transaction fees and other forms of economic activity on the network. This shift is crucial for maintaining long-term sustainability without diluting the value of the currency.

Application-Based Staking (e.g., Aave)

Interestingly, Aave isn’t a blockchain in itself—it’s an application built on top of blockchain infrastructure.

In Aave’s case, staking rewards operate more like dividends from a traditional business. As a decentralized lending protocol, Aave earns revenue by charging fees to borrowers. A portion of those profits can then be distributed to AAVE token holders as staking rewards.

This model is fundamentally different from reward mechanisms based on coin issuance or transaction fees. Instead, it mirrors how shareholders in a company might receive dividends based on the company’s earnings—linking staking directly to the performance and profitability of the underlying application.

Risks and Lock-Up Periods

One of the key downsides of staking from an investor's perspective is the lock-up period involved. When you delegate your coins to a validator or a node, those assets are typically locked for a fixed duration, meaning you can’t access or move them immediately.

For example, with Polygon (MATIC), the unstaking period is around nine days. Across most proof-of-stake networks, this lock-up window ranges anywhere from seven to twenty-one days.

This creates a level of risk. Not only are your funds inaccessible during that time, but if the validator you’ve chosen behaves dishonestly or fails to meet performance standards, your staked coins may be slashed—permanently reduced as a penalty. So, while staking offers rewards, it comes with trade-offs in terms of liquidity and risk.

Introduction to Liquid Staking Derivatives (LSDs)

This is one of the key drawbacks of traditional staking: most investors don’t want to lock up their coins for extended periods. To solve this, several service providers offer what are known as liquid staking derivatives—a solution that allows users to earn staking rewards without locking their assets.

Here’s how it works:

An investor holding a token—let’s say Polygon (MATIC)—wants to earn staking yields but avoid the typical lock-up period. Instead of staking directly, the investor deposits MATIC with a service provider like Lido. Lido, in turn, stakes the MATIC on the investor’s behalf with reputable validators in the Polygon network.

You can view these validators and their performance metrics, such as commission rates and checkpoint activity. For example, many charge a 10% fee and show 100% checkpoint signing, indicating strong reliability and consistent operation.

Now, to eliminate the lock-up problem, Lido issues a liquid staking derivative—in this case, a token called stMATIC (staked MATIC). This token is freely tradable and represents your stake in the network.

Even though your original MATIC is locked with validators, stMATIC remains liquid. The yield generated—say, 9%—is passed on from the validator to Lido, and Lido reflects that return through stMATIC. You continue to earn staking rewards, but your asset remains accessible and liquid, giving you the best of both worlds.

How Liquid Staking Maintains Value

The main advantage of this system is that you don’t need to lock your coins with a validator node to earn staking rewards. But that naturally raises a question: if others are locking their coins to secure the network, how is it possible for your coins to remain liquid while still earning yield?

The answer lies in how services like Lido manage their liquidity. Imagine there's $1 billion worth of assets staked through Lido. On any given day, only a small fraction—say, $1 million—is typically redeemed. To meet this demand, Lido maintains a reserve, or float, of unstaked coins specifically to handle daily redemptions.

This setup ensures that the liquid staking derivative—such as stMATIC—remains redeemable 1:1 for the underlying staked asset. Because of that, the price of the derivative rarely deviates significantly from the value of the actual staked token. If it ever does—let's say stMATIC is trading at a 1% discount—market participants, such as traders or arbitrageurs, will step in. They’ll buy the discounted stMATIC, wait the required unbonding period (e.g., nine days), and then redeem it for full value, earning a 1% profit in the process.

This arbitrage opportunity naturally keeps the price of the liquid staking derivative aligned with the underlying staked token. So you get a liquid asset that stays close to its base value while continuously earning staking rewards—a highly efficient and flexible alternative to traditional staking.

Buying Liquid Staked Tokens on the Market

You don’t even need to stake your coins directly anymore. Thanks to liquid staking derivatives (LSDs), you can simply buy a staked version of a token on the open market.

For example, if you look at staked MATIC (stMATIC), you’ll notice it typically trades very close to a 1:1 ratio with regular MATIC. At times, though, there’s a slight deviation. Say stMATIC is trading at $0.98 while MATIC is at $1. That means you can effectively acquire staking rewards at a 2% discount just by purchasing the staked version on the market.

This price difference creates an arbitrage opportunity. Traders can buy stMATIC at a discount, hold it through the required period, then redeem it one-for-one for MATIC, pocketing the spread. Because of these arbitrage dynamics, the price of stMATIC tends to stay closely pegged to the underlying MATIC token.

As a result, investors benefit. You gain exposure to staking rewards without having to lock your tokens directly with a validator. The process is simpler, more flexible, and maintains full liquidity while still generating passive income.

Native Staking vs. Liquid Staking

Most blockchains today—if not already, then in the near future—will support liquid staking derivatives (LSDs). However, some blockchains, such as Cardano, are architected in a way that doesn’t require LSDs. Cardano, for instance, handles staking natively and automatically, eliminating the need for third-party staking solutions.

Principles of Sustainable Staking

There are a few important principles to keep in mind. First, staking plays a foundational role in maintaining blockchain security and operational integrity. It rewards both node operators and investors, aligning incentives within a market-driven, decentralized system.

In the early stages of most networks, staking rewards are distributed through token emissions—that is, by minting new coins to attract participation and secure the network. However, this model is not sustainable long-term. Eventually, the source of staking yields must transition away from inflationary emissions and move toward revenue generated by the network itself—such as transaction fees and smart contract execution fees. At that point, the blockchain operates more like a traditional business: it earns income through user activity and redistributes part of that revenue back to stakeholders.

Real Yield vs. Nominal Yield

It’s critical to distinguish between nominal yield and real yield. If you’re earning a 5% staking reward but the protocol is inflating its supply by 25% annually, you’re not actually gaining value—you’re being diluted. In that scenario, your real return is effectively -20%, despite the appearance of a positive yield.

Think of staking as receiving future dividends. In an ideal system, all staking yields should be derived from the fees paid by users to the blockchain. These fees act as the revenue for the network, and in turn, participants—whether they are node operators or investors—are rewarded for their role in maintaining the integrity and operation of the blockchain.

How to Stake Your Crypto

You can stake directly through the blockchain using its official wallet, which typically includes built-in staking functionality. Alternatively, you can stake via third-party service providers like Lido, or even through centralized exchanges. Each option comes with its own set of trust assumptions, trade-offs, and varying levels of convenience.

Final Thoughts on Staking Sustainability

Staking can seem complex at first, but at its core, it's simply a mechanism that pays a yield to investors in exchange for helping maintain and secure the network. The key point to understand is that long-term staking rewards should not come from the continuous creation of new tokens—that’s inflation, not real yield. A sustainable model relies on a fixed coin supply, where staking rewards are funded through transaction and protocol fees, not by diluting the existing holders.