Proof of Stake (PoS) is a blockchain consensus mechanism in which validators lock up the network's own tokens as collateral for the right to propose and confirm blocks, and lose part of it if they break protocol rules. On Ethereum a validator deposits at least 32 ETH; the protocol randomly picks a proposer for each slot and finalises a block once validators holding two-thirds of staked ETH attest to it. Conflicting signatures are slashed: stake is burned and the validator removed. Security rests on the economic cost of misbehaving rather than electricity, and Ethereum's switch at the Merge on 15 September 2022 cut energy use by roughly 99.95%. For custodians and exchanges, staking is often a material revenue line.
How does proof of stake work
On Ethereum, the largest PoS network, a validator must deposit at least 32 ETH to activate. The protocol randomly selects a proposer for each slot and assigns committees of validators to attest to blocks; a block is finalised once validators holding two-thirds of the staked ETH have attested to it. Honest validators earn newly issued ETH plus transaction priority fees.
Since the Pectra upgrade went live on 7 May 2025, a single validator can hold an effective balance of up to 2,048 ETH and earn rewards on any amount between 32 and 2,048 ETH. Large operators no longer need to run thousands of separate 32 ETH validators, which cuts the number of keys and machines they have to secure.
What is slashing
Validators that sign two conflicting blocks or contradictory attestations are slashed: part of their stake is burned and they are forcibly removed from the validator set. Exits are rate-limited, so an attacker cannot commit a slashable offence and withdraw before the penalty is enforced. Validators that are merely offline lose smaller amounts through inactivity penalties.
Proof of stake vs proof of work
Ethereum switched from proof of work to proof of stake at the Merge on 15 September 2022, which cut the network's energy consumption by roughly 99.95%. The attack model also changes. To control a PoS chain, an attacker must buy a large share of the staked token, which pushes up its price while they buy and puts that stake at risk of slashing. In proof of work, the attacker needs hardware and energy that keep their value outside the network.
Illustrative staking economics: a custodian staking 3,200 ETH for clients on a network paying 3% a year earns 96 ETH. If it keeps a 15% commission, clients receive 81.6 ETH and the custodian 14.4 ETH, before node-operation costs. A single slashing event would hit clients' principal, which is why staking terms must say who bears that loss.
How staking is regulated
In the US, SEC staff stated on 29 May 2025 that certain protocol staking activities do not involve the offer and sale of securities. The statement covers solo staking, self-custodial staking through a third-party node operator and some custodial arrangements. In the EU, a CASP authorised under MiCA must publish sustainability indicators on the consensus mechanism of each crypto-asset it services, in the format set by Commission Delegated Regulation (EU) 2025/422.
For a buyer of a licensed exchange or custodian, staking is often a material revenue line. Diligence should cover how client stake is segregated, who bears slashing losses, and whether the authorisation covers custody and administration of crypto-assets on behalf of clients.