Staking is how proof-of-stake blockchain networks secure themselves. Instead of miners burning electricity to solve puzzles, validators lock up, or stake, a certain amount of cryptocurrency as collateral. The network then selects validators to propose and confirm blocks of transactions. Honest validators earn staking rewards; dishonest ones risk having their staked coins slashed, partially or fully confiscated.
How staking works
- You hold a cryptocurrency that uses proof of stake, such as Ethereum, Solana or Cardano.
- You delegate or lock your tokens through a staking contract, either directly on-chain or through an exchange.
- Your staked tokens help the network validate transactions and maintain security.
- You earn staking rewards, typically paid in the same token, at rates that vary by network and demand.
Ways to stake
| Method | Minimum | Complexity | Control |
|---|---|---|---|
| Run your own validator | 32 ETH for Ethereum | High | Full |
| Delegate to a validator | Varies by network | Medium | Partial |
| Exchange staking | Often no minimum | Low | Custodial |
| Liquid staking | Often no minimum | Medium | You get a tradeable receipt token |
Exchange staking, offered by platforms like CoinDCX and Binance, is the simplest option. You click a button and the exchange handles the technical side. The trade-off is that the exchange controls your keys.
Staking rewards
Annual reward rates typically range from 3% to 15% depending on the network, the total amount staked network-wide and the platform you use. These rates are not fixed. As more people stake, individual rewards often decrease.
Staking and Indian tax
Staking rewards are taxable income in India. The Income Tax Department classifies cryptocurrency as a Virtual Digital Asset. Rewards received from staking would be taxed at 30% under Section 115BBH at the time of disposal. Additionally, the 1% TDS under Section 194S applies when you sell or transfer the staked or reward tokens.
Risks
- Lock-up periods: some networks or platforms require you to lock tokens for days or weeks, during which you cannot sell.
- Slashing: if the validator you delegate to misbehaves, a portion of your stake can be penalised.
- Platform risk: exchange staking means trusting the exchange with your tokens.
- Price volatility: even while earning 10% in staking rewards, the token's price can fall 50%.