The Anatomy of Staking Yield

If you follow cryptocurrency, you’ve likely come across the term staking in relation to various crypto assets and applications. As the ecosystem has grown, we find that the word staking has become more of an umbrella term, referring to multiple different practices among users, leading to confusion in an already complex industry. 

The two main uses of the word staking refer to: 

Depositing tokens into an application to support a service offering for users, and 

Locking tokens on a network to propose, attest, and add blocks to a blockchain 

The former helps form the foundation of sectors like Decentralised Finance (DeFi), which strives to replicate financial services traditionally offered by institutions and intermediaries, but within cryptocurrency platforms . The latter however supports the ongoing operations and security of Proof-of-Stake (PoS) blockchains that DeFi applications often depend upon to settle transactions. It is a revenue-generating task inside PoS networks that, combined across all chains, has garnered $15 billion in annualised rewards thus far in 2022. 

we dissect staking according to the second definition above, where PoS blockchains employ stakers to generate and secure their transaction record. Particularly, we address how these stakers — often called validators — earn yield in exchange for their efforts, and what factors may affect that yield. 

Key Takeaways 

In the end, staking yields depend on; 

The total amount staked, and 

The total amount of rewards released to stakers 

However, each of these factors is subject to changes, especially the rewards released to stakers, which in turn are based on: 

The inflation schedule of the protocol, and 

The transaction fees of users 

The CoinShares Research Team believe that staking is a promising revenue generation tool for investors, potentially dampening the negative impact of dilution in inflationary PoS assets. However, it is unclear whether staking will be a reliable real-earnings strategy for business ventures, and also whether these staking assets will continue to accrue value beyond their speculative developmental stages.