What is staking?
Staking is the locking of crypto-assets at a validator of a proof-of-stake blockchain. The validator checks transactions and proposes blocks, and the network pays rewards for this work. A staked asset is no bank deposit: no bank owes the amount, and the network can destroy part of it.
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Staking in brief
| Term | Staking, in crypto also staking cryptocurrency. German: Staking. |
|---|---|
| What it does | Locks the native asset of a proof-of-stake (PoS) blockchain so that a validator can take part in the validation of blocks. |
| A number | An Ethereum validator "requires at least 32 ETH and can hold up to 2048 ETH" (ethereum.org). |
| EU law | Regulation (EU) 2023/1114 (MiCA) has no provision on staking. A staking service for clients needs the authorization for custody under Article 75 (ESMA_QA_2067). |
| Date of application | MiCA applies from (Article 149(2)). |
| Supervisors | BaFin in Germany, FMA in Austria, FINMA in Switzerland. |
What is proof of stake (PoS)?
Proof of stake is the rule by which a blockchain decides who may add the next block. The Ethereum documentation calls it "a way to prove that validators have put something of value into the network that can be destroyed if they act dishonestly" (ethereum.org, ).
Staking vs mining is the difference between two such rules. Ethereum ran on proof of work, the rule that Bitcoin miners follow, until 2022. The documentation gives the reasons for the switch: proof of stake "is more secure, less energy-intensive, and better for implementing new scaling solutions".
How does staking work in crypto?
Staking works through a deposit and a piece of software. What staking Ethereum means in practice is stated in the documentation: "a user must deposit 32 ETH into the deposit contract and run three separate pieces of software: an execution client, a consensus client, and a validator client."
Time on Ethereum is divided into slots of 12 seconds and epochs of 32 slots. Validators propose blocks and vote on the blocks of others. A vote is called an attestation.
A holder with less than 32 ETH can join a pool or hand the operation to a provider. The signing keys are then "entrusted to someone else who could behave maliciously", as the Ethereum staking page puts it.
What are staking rewards and staking fees?
Staking rewards are the payments of the network to validators. On Ethereum they consist of rewards "for proposing blocks, including unburnt transaction fees, and attesting regularly to the state of the network" (ethereum.org, ).
Staking fees are the share that a provider keeps. The European Commission describes the split in its answer on staking services: the rewards "are then distributed between the service provider as consideration for their service" and the clients, "who are the ultimate owners of the crypto assets that are staked". This page names no reward rate.
Is staking crypto safe or risky?
Staking crypto is risky in the ways that FINMA lists in its Guidance 08/2023 of .
| Risk | What happens |
|---|---|
| Technical risk | The network deletes part of the stake when a validator misbehaves (slashing). Penalties also follow when a validator goes offline. |
| Counterparty risk | The provider goes bankrupt and the legal position of the staked assets is unclear. |
| Market risk | Unstaking has a lock-up or exit period, so the holder cannot sell at once. On Ethereum the period grows with the number of unstaking orders. |
The Ethereum documentation describes slashing: "part of the validator's stake is destroyed and the validator is forcibly removed from the network."
What are staking services, and is staking crypto legal?
Staking services are offers in which an intermediary stakes the assets of clients for a fee. Staking crypto is legal in the EU. The European Commission answered the question on : MiCA "does not therefore prohibit staking, and staking as such is not subject to specific requirements or licensing."
That sentence covers the holder who stakes alone. A provider holds the assets or the private keys of its clients, so the service "is ancillary to custody services which are fully covered under MiCA". The provider needs the authorization for custody under Article 75 of MiCA and is liable for losses that are attributable to it.
Staking in Germany, Austria and Switzerland
In Germany and Austria MiCA applies directly. BaFin is the competent authority in Germany under section 3 of the Kryptomärkteaufsichtsgesetz (KMAG) of . BaFin's notice of adds that a custodian that moves client tokens to a staking contract may also provide a transfer service.
In Austria the FMA is the competent authority under the MiCA-Verordnung-Vollzugsgesetz. A bank or asset manager in either country that stakes client assets holds keys for clients and falls under the custody rules of Article 75: a written agreement, a custody policy, a register of positions and segregated holdings.
Switzerland is outside the EU, so MiCA does not apply there. FINMA states in Guidance 08/2023 that assets staked on the custodian's own account cannot be segregated in a bankruptcy. For staking on behalf of clients, FINMA does not require banks to hold capital for the staked assets if five conditions are met. Two of them: the client has given a specific instruction, and the validator address can be allocated to the client. This page gives no legal advice.
Sources
- ethereum.org: How to stake your ETH, updated
- ethereum.org: Proof-of-stake (PoS), updated
- European Securities and Markets Authority: ESMA_QA_2067, Treatment of staking services in MiCA, answer of the European Commission,
- FINMA: FINMA publishes guidance on staking services, with Guidance 08/2023,
- BaFin: Merkblatt: Hinweise zu den Kryptowerte-Dienstleistungen nach MiCAR,
- FMA: FMA takes over supervision of crypto-asset service providers in Austria,
- Federal Republic of Germany: Kryptomärkteaufsichtsgesetz (KMAG),
- European Union: Regulation (EU) 2023/1114 on markets in crypto-assets,