Maximizing crypto returns with staking
Staking is a popular concept unique to crypto — and understanding it can help investors maximize their crypto returns.
Understanding the basics of staking
Staking is the process of “locking in” your cryptocurrencies in return for rewards often paid out in the staked token. The amount made is shown as an annual percentage return (yield) – with different crypto offering varying yields.
Staking is a crucial part of a proof-of-stake blockchain’s security but not all tokens offer staking – i.e. Stake your Ethereum and earn an additional 4.5% on top of any gains/losses from price changes. These are tokens with the highest staked values:
- Solana ($SOL) — $50B, 75% of tokens staked, ~5.8% staking yield.
- Ethereum ($ETH) — $35B, 9% of tokens staked, ~4.5% staking yield.
- Terra ($LUNA) — $33B, 41% of tokens staked, ~6% staking yield.
Staking reduces the supply of available tokens to trade and have significant impacts on the token prices.
- Cardano ($ADA) jumped 10% in March after Coinbase added Cardano staking.
- Ethereum is undergoing a massive upgrade — which will significantly impact the amount of Ethereum staked and rewards provided.
Post upgrade, total staked Ethereum could rise to 80% in the following two years — per CEO of Staked — which could impact its price. Ethereum’s yearly inflation is also expected to fall from 4.3% to 0.43%
Issuing new tokens from thin air
Stakers are rewarded with new tokens created by the project/blockchain which inflates their token supply each year (too much inflation is bad). Staking rewards fluctuate and are impacted by:
- Number of staked tokens: Yield falls as more tokens are staked.
- Change in token price: Rewards are often paid out in the token staked — so the higher the token price, the higher the yield.
In some tokens, projects pay a portion of their revenue out to stakers — i.e. LooksRare ($LOOKS) — an NFT marketplace similar to OpenSea — pays 100% of its trading fees proportionally to stakers.
Per Paul Veradittakit, partner at Crypto fund Pantera (via BBG):
- “When we do invest in projects, we definitely try to stake as much of it as we can.”
- “If you are staking tokens that go up in value and are very promising, it’s a great way to get stale yield and have the upside of the underlying technology”.
Staking often has a lockup period where tokens can’t be redeemed for days to months.
Investors: Where to stake
For the beginner: Coinbase, Kraken and Binance and other major exchanges provide staking — with available staking tokens varying per platform.
For the advanced: Staking can be done directly on a project’s site or staking pools — which requires a crypto wallet. This can provide investors more staking options but is also much riskier.