What is staking and where do staking rewards come from?

In proof-of-stake networks, the job that miners do in Bitcoin is done by validators who lock up coins as a security deposit. Locking coins this way is called staking.

Why staking secures a network

Validators propose and confirm blocks. Because they have coins at stake, cheating is expensive: a validator that signs conflicting blocks or breaks the rules can lose part of its stake (slashing). Honest work is rewarded.

Where rewards come from

Staking rewards usually come from two sources:

• new coins created by the protocol for validators;
• transaction fees paid by users.

Rewards are therefore part of the network's issuance and activity, not "interest" paid by a borrower. Reward rates change with the total amount staked and network rules.

Ways to stake

• Running a validator — requires technical skill, a reliable server and often a minimum stake.
• Delegating — on many networks you can assign your coins to a validator and share its rewards while keeping the coins in your wallet.
• Through a service — exchanges and protocols can stake for you, adding their own fees and risks.
• Liquid staking — some protocols give you a token representing staked coins that you can use elsewhere, adding smart contract risk.

Things to know before staking

• Lock-up and unbonding: many networks need days or weeks to unlock staked coins.
• Slashing: choosing an unreliable validator can cost part of your stake.
• Price risk: rewards are paid in the same coin, whose price can fall.
• Service risk: staking through a third party means trusting it.

XFasil does not offer staking. This article explains the general mechanism.