Should You Stake Your Crypto? Here’s What the Data Says

Double-digit staking yields may seem great, but after factoring for the inflation rates of most Layer 1 coins, the real yields are not always as attractive as they appear. 

What Is Cryptocurrency Staking?

With Ethereum’s transition to Proof-of-Stake quickly approaching, staking has surfaced at the top of many investors’ minds as a method of earning passive income. Staking refers to the practice of locking up cryptocurrency tokens for a set period to secure and support the operation of blockchain networks that use a Proof-of-Stake consensus mechanism. 

Unlike in Proof-of-Work-based cryptocurrencies like Bitcoin, where miners expend vast amounts of electricity to validate transactions and secure the network, in Proof-of-Stake systems, validators lock up coins as collateral to perform the same functions. In return, both Proof-of-Work miners and Proof-of-Stake stakers receive coins as a reward for their services.

While both mining and staking can be profitable, many investors consider staking a more desirable way of allocating capital as it allows them to earn a steady income without needing to purchase, run, and maintain any mining equipment. However, when deciding which cryptocurrencies to stake, many investors make the mistake of only considering the nominal staking yields instead of digging deeper. Specifically, investors often forget to check the inflation rates for cryptocurrency tokens they plan on staking, which has an impact on the real return rates for the asset. In other words, if staking a token pays out double-digit yields per year but the token has an emission schedule that results in a high inflation rate, the real return rates can be lower than expected, or even negative. 

ETH Yields After the Ethereum Merge

Using current and historical data from the cryptocurrency price and staking rewards aggregators CoinMarketCap and Staking Rewards, investors can estimate the exact annual inflation rate of the 10 largest Proof-of-Stake cryptocurrencies and find the current staking yields. Using these metrics, it’s possible to calculate the real staking returns for each asset by 

For example, according to CoinMarketCap data, Ethereum’s circulating supply on September 7, 2021 and September 7, 2022 respectively stood at 117,431,297 and 122,274,059, putting the network’s inflation rate at roughly 4.12%. Staking Rewards data shows that the annualized reward rate for indirectly staking Ethereum through staking pools is 4.04%, which puts the real yield for staking at -0.08%. This means that anyone who thought they were getting a 4.04% return through staking had their returns diluted by the network’s token emissions over the last year. 

While Ethereum’s negative real return rate looks bad on the surface, holders for most other Layer 1 Proof-of-Stake coins have it worse. Plus, once Ethereum completes “the Merge,” ETH issuance is set to drop from roughly 13,000 ETH to 1,600 ETH per day. This will drop Ethereum’s inflation rate from around 4.12% to about 0.49%, without factoring for EIP-1559’s fee burning.

Based on data from ultrasound.money, if Ethereum’s gas price remains the same as last year’s average, ETH will become deflationary post-Merge, shrinking its total supply by around 1.5% a year. Additionally, Ethereum’s nominal yield is expected to grow to about 7%, which—assuming the informed projections are correct—would put its post-Merge real annual yield at around 8.5%.

Is It Always Worth it?

Besides the largest soon-to-be Proof-of-Stake cryptocurrency, seven of the nine biggest Proof-of-Stake coins have generated negative real yields for investors over the past year. Cardano, Solana, Polygon, TRON, Avalanche, Cosmos, and NEAR all had negative real yields when accounting for their circulating supply growth over the last year. 

The worst of the group is NEAR, which has an inflation rate of 73.34% and a nominal return of 9.75%. That puts its real yield at -63.59%. TRON’s real yield comes in at -25.34% (inflation rate of 28.9% and rewards of 3.56%), followed by Avalanche at -25.23% (inflation rate of 33.78% and rewards of 8.55%), and Polygon at -17.75% (inflation rate of 31.36% and rewards of 13.61%). Solana’s real return rate is currently -14.38% (inflation rate of 19.7% and rewards of 5.32%), Cosmos’ is -11.7% (inflation rate of 29.57% and rewards of 17.87%), and Cardano’s sits at -3.09% (inflation rate of 6.73% and rewards of 3.64%).

Based on the data, rather than earning passive income, most Proof-of-Stake cryptocurrency stakers lost income in real terms over the past year due to aggressive token emission schedules.

The Most Profitable Cryptocurrencies to Stake

Based on the same methodology, only two of the 10 largest Proof-of-Stake cryptocurrencies (including Ethereum) have generated positive real returns for stakers over the past year.

BNB, which implements a similar transaction fee burning mechanism as Ethereum’s EIP-1559 in addition to a default coin burning mechanism based on Binance’s profits, generates by far the highest real return for stakers. BNB currently has a negative inflation rate of -4.04%—meaning its circulating supply shrunk over the past year—and offers nominal yields of around 4.24%. That puts the real return rate for BNB stakers at about 8.28%, roughly the same as Ethereum’s projected post-Merge yield.

Polkadot also generates real yield for stakers. Its circulating supply grew 12.83% over the last year, while its annualized yield rate currently stands at around 13.9%. That puts its real return rate at 1.07%. 

When factoring for token emission schedules, the real return rates of the top 10 Proof-of-Stake cryptocurrencies (including Ethereum) came in as follows over the the past year:

BNB (BNB): 8.28%

Polkadot (DOT): 1.07%

Ethereum (ETH): -0.08% (projected at roughly 8.5% post-Merge)

Cardano (ADA): -3.09%

Cosmos (ATOM): -11.07%

Solana (SOL): -14.38%

Polygon (MATIC): -17.75%

Avalanche (AVAX): -25.23%

TRON (TRX): -25.34%

NEAR (NEAR): -63.59%

Final Thoughts

The above data shows that high nominal staking rates don’t necessarily translate into high real yields. That’s why staking rates should not be the only consideration for investors looking into owning an asset. Just as importantly, crypto market volatility can impact real yields—even if an asset generates a return through staking, that may not be beneficial if it suffers a 70% drop in a bear market. As a final note, readers should be aware that cryptocurrency prices are a factor of supply and demand, meaning that if the supply of a cryptocurrency grows by 30% a year, then the demand for it must also grow at the same rate for the price to stay the same.

Disclosure: At the time of writing, the author of this piece owned ETH and several other cryptocurrencies.