What is staking, and what are the risks?

How does proof of stake work?

Every blockchain needs a consensus mechanismConsensus mechanismThe rules that let thousands of computers agree on a single version of a blockchain without trusting any one party., a way to agree on which transactions are valid and in what order. Bitcoin uses proof of workProof of workA consensus method where the right to add the next block to a blockchain goes to whoever first solves a hard computing puzzle., where miners compete with computing power. Proof-of-stake networks take a different route.

Instead of miners, they have validatorsValidatorA participant on a proof-of-stake network who locks up their own crypto as a stake to create and check blocks in return for rewards. who lock up their own crypto as a deposit. Validators propose new blocks and vote on whether other validators' blocks are valid. Those who follow the rules earn rewards. Those who cheat can lose part of their deposit.

Think of a security deposit on a flat. If all is well, you get it back, but if you cause damage, it goes towards the repairs. The deposit makes cheating expensive. Ethereum, Solana, Cardano and Polkadot all use proof of stake, each in its own way.

Where do the rewards come from?

Rewards have two main sources:

• New issuance. The network creates new coins and pays them to validators, much like the block rewardBlock rewardWhat a miner receives for adding a block to the chain: newly created bitcoin plus the network fees in the block. in mining.
• Transaction fees. Validators receive part of the network feesNetwork feeA fee paid to a crypto network, not to a bank or company, for including your transaction in a block.. On Ethereum, for example, the validator who proposes a block receives the priority fee that users pay, while the base fee is burned.

Rewards are usually quoted as an annual percentage. They vary between networks and change over time, partly depending on how much is staked in total. On Ethereum, the reward per validator falls as more validators join. Validators also often take a commission from the rewards of those who stake with them.

Keep in mind that new issuance increases the number of coins. So the rewards are not pure profit, but partly compensation for dilution that happens anyway.

Different rules on different networks

Ethereum

Running your own validator on Ethereum takes 32 ETHEther (ETH)The currency of the Ethereum network, used to pay network fees, as a stake under proof of stake and to send value between people.. Staked ETH could not be withdrawn at all until an upgrade on 12 April 2023. When a validator wants to stop, it joins a queue, and the wait depends on how many others want to leave at the same time. In September 2025, the wait was at one point more than 40 days.

Solana

On Solana, you stake SOL with a validator without handing the coins over to it. Staking takes effect and ends at the boundary of a period called an epoch, which lasts about two days. So it takes a few days to free up your coins. Read more in What is Solana?

Cardano

On Cardano, you link your ADA to a so-called stake pool. Your ADA isn't locked: it stays in your wallet and you can use it at any time. The first rewards arrive after about 15-20 days. If the pool performs badly you simply miss out on rewards, because your ADA itself is not at risk. Read more in What is Cardano?

Polkadot

On Polkadot, you nominate validators or join a nomination pool. For a long time, it took 28 days to free up DOT after unstaking. In July 2026, a change approved by an on-chain vote took effect: the wait is now at most about two days, and nominators are no longer at risk of slashing. Read more in What is Polkadot?

Lock-up periods

On many networks, your crypto is locked while it is staked, and it takes time to release it. It is a bit like a fixed-term savings account: you can't get at the money the moment you want it.

This matters most when the price falls fast. While you wait for your coins to unlock, you can't sell them, and the price can keep falling.

What is slashing?

SlashingSlashingA penalty on proof-of-stake networks. A validator that breaks the rules loses part of its stake and is removed from the network. is a penalty for serious rule-breaking. If a validator signs two different blocks for the same time slot, for example, it loses part of its deposit and is removed from the network. On Ethereum the initial penalty is small, but if many validators are slashed at the same time, the whole deposit can be lost.

This is different from simply going offline, for instance during a power cut. That usually costs only missed rewards or a small penalty. On some networks, slashing also hits those who staked with the validator. That is why it matters to choose a reliable one.

Ways to take part

• Your own validator. You run a node around the clock and carry all the responsibility. This takes technical know-how and, on Ethereum, 32 ETH.
• Delegating. On many networks, you can delegate your coins to a validator without handing them over. They stay in your own wallet.
• Through an exchange or CustodianCustodianA company that holds crypto and the keys to it on behalf of customers, such as a licensed crypto exchange.. You hand over your crypto and the service does everything. It is simple, but you rely on the company. This is called counterparty risk.
• Liquid stakingLiquid stakingStaking where you receive a token as a receipt for your stake. The token can be sold or used while the crypto itself stays locked.. You deposit crypto into a smart contractSmart contractA program that runs on a blockchain and automatically carries out what it was written to do once certain conditions are met. and receive a token that represents the staked coins. The best-known example is Lido's stETH. You deposit ETH, receive stETH, and your balance usually grows daily with the rewards. The token can be sold or used in DeFiDeFi (decentralised finance)Financial services, such as lending, saving and trading, that run on smart contracts on a blockchain instead of through a bank or other middleman. while the ETH stays staked.

What are the risks?

• The price matters most. Rewards are paid in the same crypto. If the price falls by 30%, it hardly helps that your number of coins grew by a few per cent. Read about VolatilityVolatilityHow much and how quickly the price of an asset moves up and down..
• Lock-up periods. You can't always get at your coins when you want.
• Slashing. A validator's mistakes or misconduct can cost you part of your coins.
• The service can fail. The crypto company Celsius promised returns of up to 18% on deposited crypto. In June 2022 it froze withdrawals, and in July that year it filed for bankruptcy. Customers were cut off from their assets. Its founder, Alex Mashinsky, was sentenced to 12 years in prison in May 2025. Read about the difference between custodial services and self-custody.
• Smart contracts. A bug in a smart contract can cause losses. Lido also notes that the price of stETH can fall below the price of ETH, because withdrawals take time.

If someone promises a fixed, high return from staking, treat it as a warning sign. Staking rewards are never guaranteed.

Staking and tax

Staking rewards may be taxable in Iceland. However, Skatturinn's page on crypto doesn't deal specifically with staking. Keep a record of each payment, its date and its value in krónur.

Read Crypto and tax in Iceland and talk to your accountant or Skatturinn about your own situation.

Closing thoughts

Staking is a way to take part in running proof-of-stake networks and be rewarded for it. It lets networks like Ethereum do without mining, and many see it as a way to put crypto they plan to hold anyway to work.

The rules differ between networks, though, and the risk depends a lot on the route you choose. Find out how long your coins will be locked, who holds them and what happens if something goes wrong. It is also worth reading about the risks in general.