Could someone explain Interest generated on coins?

Lets take Eth initially, but discuss some other coins as welll.

Eth generates interest when you stake, but where does this interest actually come from? Is it the gas fees people are paying to do transactions?

Apparently, there is a risk of losing your entire 32 eth stack when staking? How does this work?

Theoretically won't the supply of eth go to near 0 levels? The more it's used, the less eth there is, because most of it will end up in staking pools that will collect gas fees…. that will then be re-staked to collect more fees in an exponential incline?