What is staking? How proof-of-stake yield works and what it risks
Where staking yield comes from, the difference between running a validator, staking-as-a-service and liquid staking, the slashing and lock-up risks, and how 2025 guidance brought staking into ETFs.
Key takeaways
- Staking is the process by which holders of a proof-of-stake asset such as ether or solana lock tokens to help validate the network and earn newly issued tokens plus transaction fees in return.
- Yield is paid by the protocol, not by a counterparty. On Ethereum it has run at roughly 3 to 4 percent a year; on Solana closer to 6 to 8 percent, with the difference largely a function of each network’s issuance schedule.
- The risks are slashing (penalties for validator misbehaviour), lock-up and withdrawal delays, and, for liquid staking and staking-as-a-service, the counterparty and smart contract risk of the provider.
- US regulators clarified in 2025 that protocol staking is not itself a securities offering, and staking has since appeared inside spot ETFs and treasury-company holdings.
Proof-of-stake networks replace the energy-intensive mining of Bitcoin with a system where validators put up capital as a bond. Validators propose and confirm blocks, are rewarded for doing so honestly and are penalized for going offline or acting maliciously. Staking is how a holder participates in that system, and the reward it pays is the closest thing crypto has to a native, protocol-level yield. Since Ethereum’s switch to proof of stake in September 2022, staking has become a core component of how institutions think about holding ether, and it has spread through the ETF and corporate treasury structures built around it.
How the yield is generated
Two sources feed staking rewards. The first is issuance: the protocol mints new tokens and distributes them to validators as payment for securing the network. On Ethereum that inflation is deliberately low, under one percent of supply a year, and the yield each staker receives falls as more ether is staked, because the same issuance is shared among more participants. The second is transaction fees and, on Ethereum, the priority tips and maximal extractable value that come with proposing blocks. Solana’s higher yield reflects a higher issuance rate that is scheduled to decline over time. In every case the reward is paid in the native token, so the real return depends on that token’s price; staking increases the number of tokens held, not their dollar value.
Ways to stake
Running a validator directly on Ethereum requires 32 ether, hardware, uptime and operational skill; institutions that do it usually use a professional operator such as Figment, Kiln, Coinbase Cloud or Twinstake, which runs the infrastructure while the client keeps custody of the stake. This is staking-as-a-service, and it is the model the ETFs and most large holders use. Liquid staking, led by Lido and Rocket Pool, pools stake and issues a token (stETH, rETH) representing the staked position plus accrued rewards; the token can be traded, used as collateral or deployed in DeFi while the underlying ether keeps earning. Lido alone has controlled roughly a quarter or more of all staked ether, which has raised persistent concerns about concentration. Exchanges such as Coinbase and Kraken offer custodial staking to retail and institutional customers. Restaking, popularized by EigenLayer, lets already-staked ether be pledged again to secure other services for additional yield and additional risk.
The risks
Slashing is the headline risk: a validator that signs conflicting blocks or is offline for extended periods loses a portion of its stake. In practice, slashing on Ethereum has been rare and small, and reputable operators carry insurance or indemnities, but the risk is real and the client bears it unless the agreement says otherwise. Lock-up is the second. Ethereum’s withdrawal queue can take days when many validators exit at once, and some networks impose fixed unbonding periods of weeks. Liquid staking tokens solve that by trading, but they can trade at a discount to the underlying during stress, as stETH did in mid-2022. Smart contract risk applies to every pooled or liquid product. And for custodial staking, the assets are exposed to the custodian, which is the lesson of the exchange failures of 2022.
Regulation and the ETF question
The SEC under its previous leadership treated staking-as-a-service as a securities offering, forcing Kraken to shut its US program in 2023 and keeping staking out of the spot Ether ETFs approved in 2024, which was widely cited as a reason those funds lagged the Bitcoin products. In May 2025 the SEC’s Division of Corporation Finance issued a statement that protocol staking activities, including solo, delegated and custodial staking, do not involve the offer and sale of securities. That cleared the way for staking inside exchange-traded products, and by late 2025 issuers had begun staking a portion of ETF holdings and passing the yield to shareholders, with Solana and other proof-of-stake ETFs designed to stake from launch. Treasury companies holding ether and solana stake their holdings as a matter of course. Tax treatment in the US follows a 2023 IRS ruling that staking rewards are income when the holder gains control of them, and remains a live area of litigation and legislative proposals.
Why it matters
Staking changes what a proof-of-stake asset is. Ether held unstaked is a commodity with no cash flow; ether staked is a productive asset whose yield can be compared with a bond, priced, hedged and packaged. That is the basis of the argument that ether should be valued on a cash-flow basis, the reason staked-ETF products matter, and the reason the concentration of stake in a few providers and the terms of the operator agreement are questions worth taking seriously. The yield is modest. What it represents is not.
Frequently asked questions
Where does staking yield come from?
From the protocol itself: newly issued tokens paid to validators for securing the network, plus a share of transaction fees and, on Ethereum, priority tips. It is not paid by a counterparty, though custodial and liquid staking products add an intermediary that takes a cut.
What is slashing?
A penalty in which a validator loses part of its stake for provable misbehaviour, such as signing conflicting blocks, or in some networks for extended downtime. On Ethereum it has been rare, and professional operators typically indemnify clients, but the risk sits with the staker unless the agreement says otherwise.
Can ETFs stake their holdings?
Yes, since 2025. The SEC staff statement in May 2025 that protocol staking is not a securities offering cleared the way for Ether and other proof-of-stake ETFs to stake a portion of holdings and pass yield to shareholders.
What is liquid staking?
Pooling stake through a protocol such as Lido or Rocket Pool and receiving a tradable token, for example stETH, that represents the staked position and accrues rewards. It restores liquidity but adds smart contract risk and can trade at a discount to the underlying during market stress.
This explainer is reviewed and updated as the rules and the market change. Last reviewed September 29, 2026. It is educational content and not financial, legal or tax advice.