Crypto staking in Canada: A complete guide to earning passive income

Key details

• What is crypto staking? Staking is the process of locking up your cryptocurrency holdings to help secure a blockchain network that uses a Proof-of-Stake (PoS) consensus mechanism. In return for contributing to the network's security, you earn rewards, typically in the form of more crypto.
• Why is it a form of passive income? Once you've "staked" your assets in a protocol or with a validator, you can earn rewards without actively trading. It's a way to make your existing digital assets work for you.
• What is the primary risk? The primary risks include the illiquidity of your assets during "bonding" and "un-bonding" periods (which can last up to 28 days), and the potential for price fluctuations. While your assets are staked and illiquid, their market value can still decrease.
• Is it legal in Canada? Yes. As of July 2025, staking is the only crypto yield-earning activity that regulated platforms in Canada are permitted to offer their clients.

For many investors, the idea of earning passive income is the ultimate goal. It’s a strategy that allows your assets to work for you, generating returns without requiring your constant attention. In the world of digital assets, crypto staking has emerged as one of the most popular methods for achieving this.

But what exactly is staking, how does it work, and how does it differ from a more aggressive strategy like "yield farming"? This guide will break down everything you need to know, with a specific focus on how these activities are viewed within the Canadian regulatory landscape.

What does crypto staking mean?

In crypto, staking is the act of locking your tokens in a consensus protocol, so that they can be used to secure the network and earn crypto rewards for doing so. It is a commonly-used method of earning passive income with existing crypto holdings.

Staking is only available on networks that utilize a Proof-of-Stake (PoS) consensus mechanism, such as Ethereum, Solana, Cardano, and Cosmos, among many others. Networks that utilize Proof-of-Work (PoW) consensus, like Bitcoin, Litecoin, and Dogecoin, do not allow token holders to stake their tokens.

How does crypto staking actually work?

To understand staking, you first need to understand the two main ways blockchains are secured: Proof-of-Work vs. Proof-of-Stake.

• Proof-of-Work (PoW): In a PoW network like Bitcoin, powerful computers (or "miners") compete to solve a complex mathematical problem. The first one to solve it gets to add the next block of transactions to the chain and earns a reward. This process is secure but consumes a massive amount of energy.
• Proof-of-Stake (PoS): In a PoS network like Ethereum, there are no miners. Instead, there are "validators." These validators lock up—or "stake"—a large amount of the network's cryptocurrency as collateral. In return, the network chooses a validator to create the next block and validate transactions. If the validator acts truthfully, they receive a reward. If they act maliciously, they risk losing their staked assets (an event known as "slashing").

In many networks, validators are chosen to create new blocks based on the amount of tokens they have staked and the longevity of their tenure as a well-performing validator. This makes it advantageous for validators to have as many tokens as possible staked.

When a validator adds a new block to the chain and it is accepted by the other validators in the network, the validator that created the block is rewarded with either newly-minted tokens or tokens that the network collected in transaction fees. This reward is the economic incentive that drives staking activities.

Validators earn rewards for posting new blocks to the chain, thereby incentivizing validators to stake more assets to be selected to post new blocks to the chain in the future, which will earn more rewards.

What is a staking pool?

Since validators are incentivized to have large amounts of tokens staked, it is advantageous for them to allow outside token holders to contribute their tokens to the staked assets of the validator and then share rewards with those contributors. Ultimately, this is the logic behind staking pools.

Large-scale validator operators such as Figment and Coinbase, which offer staking-as-a-service, allow their partner organizations or individual users to allocate their assets to their validators and then distribute rewards earned proportionally to each contributor after taking a small fee.

This allows these validators to have a larger staked amount, which results in the validator being chosen to post new blocks more frequently, ultimately earning more rewards, while also allowing regular token holders to participate in network security.

What are the risks of staking crypto?

While staking can be an effective way to earn passive income, it's crucial to understand the associated risks.

• Illiquidity and un-bonding periods: To stake your assets, your tokens must go through a "bonding" period where they are locked in the protocol. During this time, your assets cannot be moved, sold, or traded. While staked, they remain illiquid. To exit, they must go through an "un-bonding" period. These lock-up periods are set by each network and can range from a few minutes to 28 days or more. It is critical to be aware of these durations, as the market value of your staked assets can still decrease while they are illiquid.
• Slashing risk: If a validator posts an invalid block or is found to be behaving maliciously, the network can seize some or all of their staked assets as a penalty. This is known as slashing. While most professional staking-as-a-service providers have excellent track records, it's important to know that if you delegate to a staking pool, your assets could be forfeited if the validator acts in a negligent manner.

Is staking the same as yield farming?

No, there are significant differences between the two.

• Staking is the act of committing tokens to a validator that creates new blocks on the blockchain to earn rewards from the blockchain protocol.
• Yield farming refers to other ways to use crypto to earn rewards or interest income in DeFi (decentralized finance) protocols.

Typically, those involved in yield farming actively monitor various protocols and will move their assets through different protocols to optimize interest yield.

What are common ways of yield farming?

Crypto lending and liquidity protocols are some of the most common.

In lending protocols, yield seekers commit their crypto assets to be loaned out to borrowers who are securing collateralized loans. The borrowers pay an interest fee, which is distributed to the token owners who committed their tokens to the loan.

Liquidity protocols typically exist in DEXs (decentralized exchanges) where the DEX will pay an interest fee to token holders who are willing to contribute their tokens to a liquidity pool where they will be used for trading by the DEX’s active trading users. Rewards may be earned in the form of a DEX token, which can then be taken and utilized in another yield-earning protocol.

As of July 2025, staking is the only yield-earning activity that is allowed by Canadian regulators to be offered to individual clients on crypto trading platforms. Canadians who wish to engage in yield farming must extract their crypto from regulated platforms and engage in DeFi protocols on their own.