Crypto can earn income while you hold it, mainly through staking proof-of-stake coins such as Ethereum, Solana, Cardano, Polkadot, Cosmos and Avalanche, lending coins to borrowers, and providing liquidity to decentralised exchanges. None of it is risk-free. Staking rewards are paid mostly in newly issued coins and do not protect you from a falling price, lending depends on the borrower or platform repaying you, and every method carries the risk of losing money. This guide explains how each method works, compares the main staking coins and lists the warning signs of offers that are too good to be true.
Staking: earning for helping run a network
Proof-of-stake blockchains reward holders who lock coins to help secure the network, either by running a validator or by delegating to one. Rewards come mostly from new coins created by the protocol, plus a share of transaction fees. That matters: if a network issues new coins at 5% a year and you earn 5%, staking keeps your share of the network level rather than making you richer in real terms. The useful question is not the headline rate but the rate minus inflation, and whether the coin’s price holds up.
How each major staking coin works, at the time of writing:
| Coin | How you stake | Getting your coins back |
|---|---|---|
| Ethereum (ETH) | Run a validator with 32 ETH, or use a staking pool or liquid staking token such as Lido’s stETH or Rocket Pool’s rETH | Withdrawals have been possible since April 2023; exiting a validator waits in a queue that varies with demand |
| Solana (SOL) | Delegate to a validator from a wallet, or use a liquid staking token | After the current epoch ends, usually two to three days |
| Cardano (ADA) | Delegate your wallet to a stake pool | No lock-up; the ADA stays spendable. Rewards start after a few five-day epochs |
| Polkadot (DOT) | Join a nomination pool or nominate validators directly | An unbonding period that has long been 28 days; Polkadot governance has been working to shorten it, so check the current figure in your wallet |
| Cosmos (ATOM) | Delegate to a validator | An unbonding period of 21 days |
| Avalanche (AVAX) | Delegate at least 25 AVAX to a validator for a fixed period | Returned when the chosen period ends, between two weeks and a year |
Rates change constantly with the amount staked, network inflation and validator commission, so check the live figure in your wallet or on the network’s own site before you commit. For step-by-step help, see our guide to staking Solana.
Ways to stake
- From your own wallet. Your coins stay under your control. The main extra risk is choosing an unreliable validator.
- Liquid staking. You receive a token that keeps earning and can be traded or used elsewhere. You take on the risk of a bug in the protocol’s smart contracts.
- On an exchange. The easiest route, but the exchange keeps a cut and holds your coins, so you depend on it staying solvent.
Lending: earning interest from borrowers
On lending protocols such as Aave and Compound, you deposit coins into a pool that borrowers draw from, and you earn a variable interest rate that rises when demand to borrow is high. Borrowers must put up more collateral than they borrow, and positions that fall below the required level are liquidated automatically to repay lenders.
Centralised lending is different: you hand coins to a company that lends them on. In 2022 several of the largest, including Celsius, BlockFi and Voyager, froze withdrawals and went bankrupt, and customers waited years to recover part of their money. If a platform offers a high fixed rate, ask exactly who is paying it and how.
Providing liquidity
Decentralised exchanges such as Uniswap rely on users who deposit pairs of tokens into pools, and they pay those users a share of trading fees. The catch is impermanent loss: when the price of one token moves sharply against the other, the pool rebalances and you can end up with less value than if you had simply held the two tokens. Fees can make up for it, but often do not in volatile pairs.
Stablecoin yields
Earning interest on dollar-pegged stablecoins avoids the price swings of other coins, which makes it popular. The yield still has to come from somewhere: borrowers, trading fees or a protocol’s own token rewards. Stablecoins also depend on their issuer and can lose their peg, as TerraUSD did in May 2022, when its collapse wiped out tens of billions of dollars.
Comparing the methods
| Method | Where the income comes from | Main risk besides price |
|---|---|---|
| Staking | New coins and network fees | Lock-up periods, validator or protocol failure |
| DeFi lending | Interest paid by borrowers | Smart-contract bugs, bad collateral |
| Centralised lending | The company’s lending and trading | The company failing |
| Liquidity provision | Trading fees | Impermanent loss, smart-contract risk |
Warning signs
- Guaranteed or fixed high returns. Real yields move with the market. A promise of a fixed daily or monthly return is the classic mark of a Ponzi scheme.
- Pay for referrals. Schemes that pay more for recruiting others than for any underlying activity collapse when new money stops.
- Unknown platforms with no audits or history. Check who runs it, whether the contracts were audited and how long it has operated.
- Requests for your recovery phrase. No legitimate staking or lending service needs it.
Tax
In many countries, staking and lending rewards are taxed as income when you receive them, and selling the coins later can trigger a separate tax on gains. In India, gains from crypto are taxed at a flat 30% with 1% TDS on many transfers; the treatment of rewards is less settled, so keep a record of every reward and take advice.
Frequently asked questions
Which crypto is best for passive income?
There is no single answer. Large, established proof-of-stake networks such as Ethereum and Solana carry less project risk than small tokens advertising very high yields, but all of them can fall in price. Compare the lock-up period and the inflation rate, not just the advertised return.
Is staking safe?
Staking from your own wallet is one of the lower-risk ways to earn on crypto, because you keep control of the coins. You still carry price risk, and lock-up periods can stop you selling during a crash.
Can you lose money staking?
Yes. If the coin’s price falls more than you earn, you lose money. On some networks, validators that misbehave can be penalised, and liquid staking or exchange staking adds the risk of the platform you use.
Is crypto lending worth the risk?
Decentralised lending on long-running, audited protocols is more transparent than handing coins to a company, but smart-contract failures do happen. Only lend what you could afford to lose.
Track prices on our live crypto prices pages, including Ethereum and Cardano.
This guide is educational and is not investment or tax advice. Crypto assets are volatile and you can lose money.