Crypto staking can look deceptively similar to earning interest in a savings account. Deposit ETH or SOL, wait, and receive more tokens.
But there is usually no borrower paying interest on your crypto. Staking rewards are primarily created by the blockchain itself, with the exact source varying between networks.
On proof-of-stake blockchains, validators lock tokens to help secure the network, verify transactions and participate in consensus. In return, protocols compensate them through some combination of new token issuance, transaction fees and other network revenue.
That means a 5% staking yield is not necessarily a 5% increase in purchasing power.
New Tokens Pay Much of the Yield
The simplest source is inflation.
A blockchain can create new tokens and distribute them to validators and delegators. Solana, for example, states in its official staking documentation that staking yield comes primarily from inflationary issuance, with returns affected by the inflation rate, percentage of SOL staked, validator performance and commission.
Imagine a network with 100 million tokens that creates another 5 million to reward stakers. Those rewards are real tokens, but total supply has also increased 5%.
Non-stakers therefore own a slightly smaller percentage of the network.
This is why high APY alone does not tell investors whether staking is attractive. Our comparison of the best cryptocurrencies to stake shows yields varying substantially across networks because their issuance schedules and staking systems are different.
Solana illustrates the trade-off especially clearly. Validators have been considering changes that could accelerate declining issuance and potentially push staking yields toward 3%. Lower rewards sound negative for stakers, but lower token creation could also reduce dilution for every SOL holder.
Ethereum Adds Fees and MEV
Ethereum works differently.
Validators receive protocol-issued ETH for performing consensus duties such as attestations and block proposals. Ethereum’s reward mechanism also reduces the reward available to each validator as the total amount of ETH securing the network increases.
Validators can additionally receive priority fees from transactions and revenue associated with maximal extractable value, or MEV. Ethereum’s base transaction fee, however, is burned rather than paid to validators.
This explains an important staking dynamic: more people staking does not necessarily mean everyone earns more.
More than 35% of ETH supply is now staked, meaning rewards are being shared across an increasingly large pool of capital.
