Why proof-of-stake chains need staking
A blockchain needs a way to decide who adds the next block and to make cheating expensive. Bitcoin uses proof of work: miners spend electricity. Ethereum uses proof of stake: validators post tokens as collateral. ethereum.org describes staking as two things at once: the security mechanism of the network and a way for holders to earn rewards for doing that work.[1]
The validator's job on Ethereum is to propose blocks when selected, check the work of other validators, and attest to the correct head of the chain. Rewards are paid for attestations that match the majority, for proposing blocks and for sync committee duty. Each reward is calculated from a base reward that shrinks as the total amount of staked ether grows, so yields fall when more ETH is staked.[2]
The formula ethereum.org publishes makes this visible: the base reward uses a base reward factor of 64 and divides by the square root of the total active balance. Double the ETH staked and the per-validator reward falls, though not by half. Staking yield is therefore a network statistic, not a rate any platform can set.[2]
Ways to stake, from solo to liquid
Solo staking means running your own validator: at least 32 ETH, a machine online around the clock, and your own keys. EIP-7251, part of the Pectra upgrade, raised the maximum effective balance of one validator from 32 ETH to 2,048 ETH, so large holders can consolidate many validators into one and let rewards compound.[3]
Pooled staking lets you join with far less. ethereum.org says you can participate with as little as 0.01 ETH through a staking pool. Exchanges also offer custodial staking, where the exchange holds your ETH and runs validators for you.[1]
Liquid staking adds a receipt token. Lido, for example, takes your ETH, has node operators run the validators and gives you stETH, a token whose balance updates regularly (rebases) as rewards arrive. You can use stETH in DeFi while the underlying ETH stays staked.[8]
Lido applies a 10% fee on staking rewards, split between node operators and the Lido DAO treasury, and the DAO can change that fee by vote.[4]
| Method | Minimum | Who holds the keys |
|---|---|---|
| Solo validator | 32 ETH | You |
| Staking pool or liquid staking | As little as 0.01 ETH | Pool contracts and node operators |
| Exchange (custodial) staking | Set by the exchange | The exchange |
See also: EigenLayer · Jito · Coinbase · Kraken
Worked example: what a liquid staker actually receives
Lido documents the formula: user APR equals protocol APR times one minus the protocol fee. Suppose the protocol APR on Ethereum is 3% over a year. With the 10% fee, your APR is 3% * 0.9 = 2.7%.[4]
Stake 10 ETH and, if that rate held for 12 months, your stETH balance would grow by about 0.27 ETH to 10.27. The 0.03 ETH difference versus the gross 0.30 is the fee. None of this protects the dollar value: if ETH falls 20% over the same year, 10.27 ETH is worth less than the 10 ETH you started with.
The 3% is an assumption for the arithmetic, not a forecast. Real protocol APR moves with total ETH staked, network activity, priority fees and MEV, all of which Lido lists as inputs to its rewards.[4]
Compare that with solo staking. A home validator with 32 ETH keeps the full protocol reward, 0.96 ETH a year at the same assumed 3%, but pays for hardware and electricity, must stay online, and carries slashing risk directly. A validator using EIP-7251 compounding credentials can let rewards accumulate above 32 ETH instead of having them swept out, up to the 2,048 ETH maximum.[3]
A custodial exchange sits at the other end: no setup and no hardware, while the exchange holds your ETH and handles staking according to its own terms. The SEC staff statement notes that service providers may take a share of rewards or charge fees, and it treats that custodial model as covered only when the custodian does not decide whether, when or how much to stake.[7]
Slashing and other risks
Slashing is the protocol's punishment for provably malicious behavior, such as proposing two blocks for the same slot or attesting to two conflicting blocks. ethereum.org explains that a slashed validator has part of its stake burned immediately (its current figure is 0.0078125 ETH for a 32 ETH validator, scaled with balance), is removed from the network over 36 days, and faces a correlation penalty on day 18 that grows when many validators are slashed around the same time.[2]
Being offline is much cheaper: the penalties for missed source and target votes equal the rewards you would have earned. The bigger everyday risks for most stakers sit outside the protocol. A liquid staking token can trade below the value of the ETH behind it. A pool's smart contracts can have bugs. A custodial platform can pause withdrawals.[2]
Keep your withdrawal credentials and any seed phrase offline. Staking dashboards and "validator setup" sites are a common phishing target, because one signature can redirect a withdrawal address.
Validators that include evidence of another validator's slashing in a block are paid for it, a reward equal to the slashed validator's effective balance divided by 512. The system rewards whoever catches misbehavior, which is part of why slashing events are detected quickly.[2]
US tax and SEC treatment
The IRS addressed staking in Revenue Ruling 2023-14. A cash-method taxpayer who stakes directly on a proof-of-stake chain must include rewards in gross income for the year in which they gain dominion and control over them, at the fair market value on that date.[5]
So if you receive 0.0225 ETH of rewards when ETH trades at $3,000, you have $67.50 of ordinary income on that day. If you sell that ETH later at $3,400, the $9.00 increase over that $67.50 value is a separate capital gain, measured against your basis as the IRS page describes. The IRS digital assets page lists staking among the activities that require answering yes to the digital asset question on Form 1040.[6]
On securities law, the SEC's Division of Corporation Finance said on May 29, 2025 that protocol staking, including solo staking, staking through a third-party node operator while keeping custody, and certain custodial arrangements, does not involve the offer and sale of securities. The statement expressly left out liquid staking, restaking and custodial set-ups where the custodian decides whether, when or how much to stake. It is a staff view, not a rule.[7]
Staking on other chains
Ethereum is the reference case, but the idea is the same across proof-of-stake chains: tokens are bonded to validators, rewards follow correct behavior, and misbehavior can cost stake. The details that matter to a holder differ by chain, so check four things in the chain's own documentation: the minimum to run a validator, whether delegation is built into the protocol, how long unbonding takes, and what triggers slashing.
Delegation is the main difference in everyday use. On Ethereum there is no protocol-level delegation, which is why pools and liquid staking tokens exist. ethereum.org treats home staking as the baseline and centralized exchanges as the least impactful option with the highest trust assumptions, with staking as a service and pooled staking in between. Each step down asks you to trust someone else with part of the job.[1]
Withdrawals are the other practical point. The Shanghai/Capella upgrade, completed on April 12, 2023, enabled staking withdrawals, but exits pass through a rate-limited queue; ethereum.org says the matching activation queue can take hours to weeks. When many validators want out at once, waiting times grow, which is one reason a liquid staking token can trade below the ETH behind it.[1]
The bottom line
If you hold ETH for years and are comfortable with technical upkeep, solo staking with 32 ETH keeps the full reward and your own keys. With less than 32 ETH, choose between a custodial exchange and a liquid staking token by asking one question: whose failure would you rather be exposed to, a company or a smart contract. Either way, record each reward's dollar value on the day you receive it, because that number goes on your tax return.
See also: Crypto tax software · Hardware wallets
Educational content, not financial advice. Crypto assets are volatile; do your own research.