What Is Staking in Crypto?

If you’re new to Web 3.0, the terminology and jargon can feel like a foreign language. But when it comes to “staking”, the concept is one o the most popular and straightforward ways to grow your cryptocurrency over time. 

So, what is it? Staking is a mechanism that allows you to earn rewards by locking or delegating your digital assets (tokens) to support a decentralized network.

While its original purpose, known as Protocol Staking (or Proof-of-Stake), is to help secure a blockchain and validate transactions, the term is now widely used across Decentralized Finance (DeFi) for other purposes, such as providing liquidity or gaining governance rights.

This guide will break down how staking works, the different methods you can use, and the critical risks you must understand. Ready to put your crypto to work? Let’s dive into the core mechanics of staking.

TL;DR Definition

Staking essentially means committing and locking up your crypto on a Proof-of-Stake network to help validate and secure a chain. Rewards are paid by the network itself, often referred to as block rewards. Please note that moving funds from a Korean centralised exchanges (CEXs) like Upbit or Bithumb to an external wallet for staking typically requires Travel Rule whitelisting of the external address before withdrawal can be approved.

How Staking Works

Staking allows users to earn rewards by committing their tokens and helping to validate transaction data on the blockchain network. This is the very consensus method of Proof-of-stake blockchains to verify transactions. 

There are three main purposes for staking:

1. Accuracy of Information: Verify transactions to ensure accurate information is added to the blockchain.
2. Secure the network: Locking up your tokens secures  the network against attacks, such as the 51% attack
3. Earning income: stakers allow holders to earn rewards without selling them. 

To participate in staking, users will lock up their tokens through a smart contract. Typically, there is a cool down period for unstaking. In exchange for locking up, users are rewarded with newly-minted cryptocurrency (proportional to your share of the rate). Note that the reward mechanisms varies across different networks. Some protocols randomise rewards for a change to reward smaller participants. 

Staking Methods

Just like your steaks, staking comes in various flavors. Let’s break down each staking type and their characteristics:

1. Native Staking: This involves running your own full node and becoming a direct validator. This method often requires meeting a significant capital threshold (e.g., 32 ETH for the Ethereum network). Running a full node will require technical expertise to operate it round the clock to avoid penalties. 
2. Staking Pools and Exchanges: As not everyone will have the know-hows to set up their very own validator or have the capital to commit, users can delegate their capital to pools or exchanges to help manage it on their behalf. A popular method as it reduces both technical and monetary barriers. 
3. Liquid Staking Tokens (LSTs): The one huge barrier with traditional staking is the lockup period. LSTs are designed to represent your stake and earned rewards while keeping your original assets liquid. After locking up your tokens in a liquid staking protocol like Lido, you will receive a LST as a digital receipt of your stake assets. This LST can be used freely in DeFi protocols or traded away, giving you flexibility whilst earning staking rewards. 

Rewards: APR vs APY

When evaluating potential staking rewards, two key metrics dictate potential returns:

• APR (Annual Percentage Rate): This represents the simple interest rate earned over a year. A 10% APR on 1,000 tokens yields exactly 100 tokens after one year.
• APY (Annual Percentage Yield): This includes the effect of compound interest. Because staking activities often compound returns frequently (sometimes daily or hourly), APY typically results in a higher overall return than APR for the same nominal rate.

Note that staking rates are not guaranteed, instead they are often made as an estimation. The final reward is contingent on several factors such as network demand, amount of stakers, and market price volatility. When met with high staking rates, always proceed with caution and don’t allocate all your capital before you do your due diligence. 

Risks You Must Understand

While staking offers a passive income stream, it comes with it’s own risks:

1. Slashing

Slashing is the most punitive risk in the PoS ecosystem. It is a mandatory penalty imposed by the protocol on a validator who acts maliciously (e.g. double signing) or fails to maintain the operational requirements (e.g. significant downtime). Malicious actor’s staked tokens will be permanently burned.

2. Liquidity & Lockups

Unlike highly liquid instruments such as perpetual futures, which can be closed instantly, staked assets are often subject to a required lockup period or an unstaking cooldown period which adds a liquidity risk.

3. Smart-Contract / Provider Risks

Staking through a pool or using a third-party service introduces counterparty risk and technical failure risk. If the contract contains a bug or is exploited, the staked assets could be lost entirely. The same happens if the provider operates fraudulently or suffers from an operational failure.  

Korea How-To: From a KR Exchange to Staking

For a user holding Korean Won (KRW) on a regulated domestic exchange (VASP) and intending to use a self-custody wallet for staking, movement of funds is heavily regulated by Korean compliance standards. 

Note: This guide reflects South Korean compliance and regulatory standards as of October 23, 2025, and is subject to change.

1. Whitelisting (Allowlist) Your External Address

Korean financial authorities enforce strict Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance, specifically the FATF Travel Rule.

Travel Rule: Exchanges must collect and verify information for virtual asset transfers exceeding 1 million KRW (approximately $700 USD).,

Verification Requirement: To withdraw crypto from major Korean VASPs (e.g., Upbit, Bithumb) to a non-custodial wallet (MetaMask, Ledger), you must first register and verify that external wallet address with the exchange itself. This is necessary because some exchanges have restricted or entirely blocked withdrawals to unverified wallets.

2. Test Transfer and Withdrawal Delay

After whitelisting, always perform a small test transfer first and verify the successful on-chain transaction. Be aware that major Korean exchanges enforce mandatory withdrawal delay systems to prevent fraud, which include:

• A 72-hour delay on virtual asset withdrawals following the first KRW deposit into a user’s account.
• A 24-hour delay applied to withdrawals of virtual assets equivalent to newly deposited KRW funds for existing users.

3. Stake via Your Chosen Method

Once the crypto has successfully arrived in your verified non-custodial wallet, you can proceed to stake the assets using your chosen method (native, pool, or LST).

4. Know Your Lockup

Before staking, identify the specific network’s lockup and cooldown period for better liquidity planning. This is the delay required after initiating an unstaking request before the tokens are released back into your wallet.

KR Legal and Policy Background for Readers

South Korea is actively formalising its digital asset regulations:

• User Protection Act: The Act on the Protection of Virtual Asset Users was enacted in July 2023 and went into effect in July 2024. This legislation establishes legal definitions, mandates that VASPs safely keep and manage users’ virtual assets, and provides rules for regulating unfair trading activities.
• Crypto Capital Gains Taxation: The proposed 20% capital gains tax on annual crypto profits exceeding 2.5 million KRW (approximately $1,800 USD) has been subject to multiple delays since 2021. The current political agreement has postponed the implementation until 2027 at the earliest.
• Income Tax on Rewards: While capital gains tax remains delayed, income generated directly from activities such as staking, mining, or airdrops is generally treated as “other income” and is taxed at the individual income tax rates.

Staking vs Lending vs Savings

Staking is often compared to other yield-generating instruments, but the risk and liquidity profiles are fundamentally different. Let’s breakdown the key differences between each activity:

FAQs

Can I unstake anytime?

No. Unlike the rapid trading capabilities of instruments like crypto perpetual contracts, staked assets are often subject to a required lockup period or an unstaking cooldown period that can last for several days or weeks. You must wait for this period to conclude before your tokens are available for withdrawal or sale.

Who pays rewards?

The blockchain network itself (the protocol) pays the staking rewards. Rewards are issued as part of the block validation process, compensating stakers for the security and computational power they provide to the decentralized ledger. The rewards are not paid by a centralised exchange or lending platform.

Are rates guaranteed?

No, staking rates (APR/APY) are projections or estimates and are not guaranteed. The rewards are variable and depend on real-time factors like network transaction volume and the total number of staked tokens. Always treat high advertised rates with caution, as they are usually associated with significantly increased volatility and risk.,

Is there crypto tax now?

No. At present, no law is in effect requiring the payment of taxes on crypto capital gains in South Korea. The planned 20% capital gains tax on profits exceeding 2.5 million KRW annually has been repeatedly postponed, with the earliest current date for implementation being 2027., However, income derived from staking and mining is generally considered “other income” and is subject to standard individual income tax rates.

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