Curious about the impact of staking on the crypto ecosystem? Explore the pros and cons

In the dynamic landscape of cryptocurrency, staking has become an important trend worth exploring and understanding. As the practice of staking evolves, it is critical to delve deeper into its potential benefits and challenges.

At its core, staking involves the process of locking tokens in a designated pool, where participants can earn rewards for participating. However, this promise of liquidity may initially cause concerns within the crypto ecosystem. This is because the tokens are temporarily out of circulation during the staking period, which may affect market liquidity. Additionally, staking causes inflation because it brings more staked tokens into the market, creating an interesting dynamic.

Despite these initial considerations, staking has the advantage of making a positive contribution to the ecosystem. Staking acts as a deterrent to malicious actors by requiring participants to lock up their tokens. The automatic penalty mechanism embedded in the staking protocol can effectively deter bad behavior without the need for human intervention.

Staking reward payouts are typically made up of two main components: the staking reward itself and any transaction fees generated by the blockchain network. When you participate in a Proof-of-Stake (PoS) or Delegated Proof-of-Stake (DPoS) blockchain network, you earn staking rewards by holding and “staking” a certain amount of native cryptocurrency.

1. Staking Rewards : This is the main component of payouts. Stakeholders are rewarded with additional cryptocurrency tokens for participating in the consensus mechanism and helping to secure the network. The amount of staking rewards may vary based on factors such as the total amount of tokens staked, network inflation, and specific protocol rules.

2. Transaction fees: Some PoS and DPoS blockchains allow stakers to collect a portion of the transaction fees generated on the network. This adds an additional revenue stream for stakers in addition to the basic staking rewards. Stakers are often incentivized to actively participate in securing the network and validating transactions.

Depending on the blockchain protocol you are staking on, the specifics of staking rewards can vary significantly. Before participating in a staking campaign, it is important to research and understand the staking mechanics, reward structure, and potential risks associated with each blockchain.

As shown in the figure below, for well-known blockchain networks, staking rewards show a range of fluctuations, ranging from 3% to 14%.

Here’s a ranking based on the most generous staking rewards. This ranking highlights more unconventional blockchains employing higher rewards to attract users. However, it is worth noting that uninformed investors may consider the 50% reward a favorable prospect and simply stake their tokens and wait.

In fact, this view captures only a small part of the complexity involved. To get a more complete picture of your investment performance, it is important to consider the inflation rate in the same currency. This factor has a huge impact on your ROI.

The concept of a “free lunch” doesn’t apply here. Staking rewards are funded by the blockchain through the issuance of newly minted tokens, putting pressure on the overall token supply. This situation results in dilutive effects being borne by token holders. This concept closely reflects real-life scenarios. To elaborate, if inflation is 5% and your investments fail to generate a minimum return of 5%, your wealth will decrease over time. There is no mysterious solution to this reality.

Let’s take a closer look at Ethereum

ETH’s current effective reward rate is 4.35%, while the inflation rate is 0.09%. Additionally, approximately 20% of ETH tokens are staked. While this number may seem significant, it actually has one of the lowest staking rates compared to other proof-of-stake (PoS) blockchains.

For investors taking a progressive or more ambitious approach

Lido stETH tokens are a synthetic representation of the Ethereum (ETH) you stake on the Ethereum 2.0 chain . Lido Finance is a decentralized finance (DeFi) project that allows users to stake their ETH on the Ethereum 2.0 network and receive STETH tokens in return. These tokens represent a portion of the total ETH staked by Lido in the Ethereum 2.0 staking contract. The benefit of staking through Lido is that it provides liquidity for staked ETH, allowing users to trade or use their staked assets in DeFi applications while still receiving staking rewards. This is a way to participate in Ethereum’s proof-of-stake consensus mechanism while maintaining the flexibility of your staked assets.

Liquid tokens provide an opportunity to increase your income beyond Ethereum Core staking rewards. Investors are often attracted by the prospect of increased return on investment (ROI), but it is important to recognize the inherent risks associated with participating in multiple staking programs.