Staking 101: How Locking Crypto Generates Passive Income
Trading, mining, lending — there’s more than one way to make money through crypto. Staking is yet another method, and it allows investors to generate passive income with their coins and tokens.
Crypto staking may seem complicated between APYs, locking periods and payouts, but its premise is simple: You lock your crypto to support the network, and in return, you get compensated for helping it run smoothly while your assets cannot be traded. That reward is typically paid out in the same cryptocurrency you staked
There are subtleties to staking that are important to understand before getting involved. Read on to learn how crypto staking works and the different ways to participate so you can decide whether it’s a smart move for your investment portfolio.
How crypto staking works
When you stake, you are committing crypto to a blockchain network, which makes your coins and tokens unavailable for trading. That stake serves as collateral for being chosen to validate transactions and add new blocks to the network, thereby helping to secure it.
Think of it as leasing your coin to the network: You still own it, but you earn rewards for putting it to work. The longer and larger your stake, the bigger your reward.
For example, imagine you’re holding five ether (ETH) and decide to stake it through a major centralized crypto exchange like Coinbase. The average staking reward for ethereum in 2025 hovers around 4% annually, which means investors would earn approximately 0.2 ETH (about $700 at current prices) over 12 months — steady, albeit modest returns.
The staking model is rooted in proof of stake (PoS), an increasingly popular system that’s replacing the energy-intensive proof of work (PoW) used by early cryptocurrencies like bitcoin. Unlike PoW, which relies on crypto miners solving complex mathematical puzzles, PoS reduces energy consumption by eliminating this computational race.
Why should you stake your crypto?
The most obvious advantage of crypto staking is the level of effort involved. Whereas crypto trading requires you to be actively engaged in the market and educated on crypto trading signals in order to make a profit, staking demands nearly no input. It’s akin to earning interest in a bank: You deposit your funds and then rake in passive income.
In many cases, that income can be substantial. Take, for example, crypto platform and wallet provider Best Wallet. Best Wallet’s integrated decentralized aggregator sources the highest APYs on the market.
Another advantage of staking is its accessibility. Unlike crypto mining, which requires specialized hardware and technical know-how, staking only requires that you hold a compatible cryptocurrency and choose how you want to participate. This shift has democratized the process of contributing to a blockchain network, opening it up to a much wider audience.
Staking isn’t without trade-offs, though. When you stake tokens, they’re often locked up for a fixed period of time. You can’t sell or move them without incurring penalties, and if the validator you’ve chosen performs poorly or misbehaves, you may face "slashing" penalties that reduce your staked balance.
How to stake your crypto
Although crypto staking may sound refreshingly simple, it can be done in one of several ways, ranging from hands-on technical setups to the easy one-click options offered by many popular exchanges.
The right staking method for you will depend on your technical comfort level, how much crypto you hold and how involved you want to be in the process.
Passive staking
The most popular approach to crypto staking — and for many people, the most practical one — is passive staking. This involves trusting a third party to stake on your behalf, choosing a validator and monitoring the technical aspects of the process. While this is the simplest form of staking, it typically offers lower returns because the platform takes a cut of your earnings.
To start with passive staking, all you need to do is choose a custodial platform for your crypto and deposit your coins. Then, you collect your rewards automatically. Crypto exchanges and wallets like Best Wallet, which allows you to stake crypto on over 60 different blockchains and scans hundreds of validators for the most competitive rates, are a popular choice.
Delegated staking
Delegated staking is similar to passive exchange-based staking, but the main difference is that you maintain control of your tokens by keeping them in your own crypto wallet. You also have greater agency, as you may choose a validator yourself to represent your stake and can often re-delegate to a different one if you’re unhappy with their performance or fees.
Active staking
Active staking is the most demanding approach to crypto staking, as it involves running your own validator. To do this, you need a significant amount of crypto, specialized software and a reliable internet connection to keep your node online 24/7.
This method comes with the highest level of control and potentially the greatest returns. But if you fail to meet its requirements, you risk missing out on rewards or even being penalized.
Direct staking
Some blockchains allow you to stake tokens directly through their native wallets or platforms. This method provides a good balance between control and simplicity: You handle the staking process yourself, but you don’t need to run a validator node.
Direct staking usually offers better rewards than exchange-based options, though it may require you to interact directly with blockchain tools or smart contracts.
Liquid staking
One of the newest innovations in crypto is liquid staking. This method allows you to stake tokens and receive a derivative token in return — essentially a placeholder that represents your staked assets. You can use this derivative token in decentralized finance (DeFi) platforms to trade, lend or earn additional yield while your original stake continues earning rewards.
While this method lets you stay flexible without sacrificing potential income, it’s best suited for more advanced crypto users who understand the added risks of interacting with DeFi.
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