A broad overview of the ‘how’ and ‘why’ of staking
Life-changing, generational wealth cannot be built overnight.
But it can be built in a bear market, and one of the best ways to do that is via staking the web3 way to generate passive income.
Staking, and the rewards that come with it, are a “set it and forget it” way of growing your finances – sometimes with hourly or daily payouts, I’ve even seen 15-minute payouts – simply by purchasing a crypto asset and then holding it in your wallet, sometimes without even having to lock it up for an extended period of time.
When taking into account the potential for cryptocurrencies, tokens, NFTs and more to explosively appreciate in value, even small amounts of rewards can quickly create real value, especially if they automatically compound as they often do:
When taking trading, mining, faucets, Play to Earn and staking into account, significant holdings can be created at a cost of only time assuming one has access to the internet. You can use the Staking Rewards earning calculator to help visualise your earning potential, and it all adds up. That being said, those looking to stake over $500k should visit the Staking Providers page instead.
As the blockchain does not discriminate, anyone can seemingly create a stream of passive income for themselves and in the future, as “stagflation” takes hold, this will become increasingly beneficial to the layperson. We need only find a way to implement it on a grander scale.
Why do we think passive income is important on a grand scale?
Let’s find out.
A short history of staking
From early eyebrow raisers to today, as the UK government has put out a call for consultation on taxing DeFi lending and staking, the history of passive income has been one of increasing interest and potential:
One could easily mark the release of the Bitcoin Whitepaper on October 31st 2008 on this chart, and imply a direct connection between it and the ramifications of decentralised finance for passive income but there are, of course, non-crypto ways to generate a passive income.
Smart money does both.
Proof of Stake, the natural evolution of the Proof of Work consensus mechanism that rewards participation in the ecosystem rather than computational power, is a more likely contender driving the growth behind passive income – although Bitcoin and Ethereum still have not migrated to this “new” way of doing things. In 2012, Peercoin emerged on the scene and was followed by Blackcoin, Nxt, Algorand and more recently Cardano. Some newer Layer-1 solutions such as Near Protocol referenced above have moved so far away from the heavy energy consumption model of the Proof of Work consensus model that they are certified carbon neutral, and are finally beginning to solve what is known as the Blockchain Trilemma via sharding solutions.
Thanks to new solutions like these, it is much easier than in previous years to begin on this journey, but accessibility remains a challenge for emergent tech like blockchain and the third version of the web that it powers, so it’s worth looking at the “why” of staking/passive income.
This newfound environmental friendliness is just one of the reasons investors should consider staking to earn a passive income, along with the higher APYs, low (if any) fees, and securing both the blockchain networks and their own financial self-sovereignty.
FIAT Vs Crypto APYs
Since 2020, hedge fund managers have been including cryptocurrency worth billions in their portfolios whilst high street banks offer interest rates on cash of between 0.01% and 1.5%. Bitcoin returned more than 300% that year.
That year and the ones that followed have been big ones for both institutional and retail investment into the web3 space, as companies and countries alike (Microstrategy and El Salvador come to mind) whilst centralised exchanges Binance, Coinbase and others swell their customer lists.
Soon, simply holding Bitcoin or Ethereum wasn’t enough, and these investors needed to get more from their digital money as fiat currency inflation rates hit double-digits for the first time in decades.
Tezos and Cosmos set an early example with a little help
Before launching the laudable Learn & Earn program, Coinbase began to offer its Yield program, introducing a huge part of the market to the staking rewards that form an integral part of so many people’s passive income strategy.
Starting with Tezos and then expanding to Cosmos, you can see that more and more cryptocurrencies and stablecoins have been added ever since.
Today, Cosmos enjoys a growth in native network delegators that puts it ahead of Tezos in terms of network size, market cap, and project ranking. Tezos as time of writing has only 409 native network stakers (known as bakers).
Now, when a new blockchain or token launches, staking and passive income utility is a near-given part of the value proposition, as investors have come to expect this capability.
But what about the discerning, high-value investors that see holding their assets on a centralised exchange as riskier than their decentralised equivalents? Well, there’s a (d)App – and a hardware wallet – for that, along with multiple native and non-native wallets.
The Lido Example
Lido Staked Ether (StEth) at time of writing boasts a market cap of nearly $5 billion, putting it firmly in the top 20 projects, even in the full swing of the bear market and despite a number of issues such as “de-pegging” (NB: it’s a little more technically complex than a simple depegging with Lido, as stETH is unlocked post-merge and should not be 1:1) – more on that in a moment – what does this tell us?
It tells us that, post-Celsius Network and Terra collapse, risk remains of further de-pegging events, but that has not deterred the legion of Ethereum hodlers looking to generate their passive income via staking ETH.
Ledger Live, the software twin of the Ledger Hardware wallets, make staking with Lido or indeed staking another cryptocurrency such as Polkadot, Eos, Tezos, Tron, Cardano and more very accessible.
Indeed, many users who have been exposed in the past may feel it safer to use Ledger for its security benefits, as the market is still reeling from…
The Terra Anchor Example (& where it went wrong)
It is near impossible to talk about the current state of the market without referencing the collapse of a top 20 project: Terra.
This writer hopes you were not exposed.
Alas, many were, and one need only look at Terra’s Anchor protocol to see why: 19.5% APY returns. If that sounds too good to be true, it’s because it was.
Once UST, Terra’s stablecoin de-pegged, the collapse was imminent and rapid, with many investors being unable to get their holdings out of the protocol as the price raced towards zero back in May:
At this point in time, the Anchor Protocol alone – not to mention assets held outside of it such as on exchanges – had a TVL of over $16bn.
A lot of people lost a lot of money, and the use case for under collateralised algorithmic stablecoins took a potentially fatal hit.
However, this serves as another reminder that there are significant volumes of trades and investors interested in generating a passive income via staking, and it is only a matter of time until more lending platforms come online and reward ecosystem participants once again.
What about Stablecoins?
During times of extreme market volatility such as the ongoing bear market, savvy investors may wish to hold their assets in stablecoins which often offer a much higher APY than their crypto cousins.
Whether Terra will be a part of that remains to be seen, but Terra has, at the very least, inspired a Mr Justin Sun.
The controversial founder of the TRON blockchain announced a rival stablecoin, USDD, targeting 30% APYs, presumably to hoover up some of the passive income enthusiasts burned by Terra. Undercollateralised algorithmic stables remain in an extremely experimental stage, and their yields carry far higher risk than their fully-collateralised peers. We believe undercollateralised algostables have revolutionary potential, but as of right now, their rates can’t be compared with their fully-collateralised / centralised / regulated peers.
The most performant stablecoins are centralised, which goes somewhat against the libertarian ethos of web3. However, while fully-collateralised stablecoins (USDT, USDC, BUSD) have not offered the 20-60% rates that their “undercollateralised algorithmic stablecoin” competitors have, they have held up nearly flawlessly under extreme market duress.
Operated by centralised exchanges Coinbase and Binance respectively, these are collateralised directly with the dollar and therefore cannot lose their pegs. At time of writing, they occupy places four and six in the CMC top 100 rankings, with the 5th place taken by BNB:
Staking Rewards data shows the average yield of USDC to be 6.31% and BUSD at 5.94%, although higher yields can be found if one does some research.
These mediums of exchange are often used for more than just earning staking rewards, and have multiple use cases that will likely keep them in the top 10 for years to come.
Older is not necessarily better, and rumours and speculation continue to hamper Tether thanks to a lack of transparency around it. Meanwhile, this tweet by Do Kwon, founder of Terra labs, has not aged well:
DAI retains a large market cap ($6+bn) and daily volumes of over 250m, but that does not mean it hasn’t been losing market share to competitors.
Another algorithmic stablecoin that is yet to be released on mainnet by Cardano developers, there is a lot of hope riding on this over-collateralised stablecoin. It is possible we will see this coin released in late July or early August, and speculation is rife about what sort of APY it may bestow upon stakers looking to generate a Cardano-based passive income.
Also an over-collateralised stablecoin, this time on the Near Protocol blockchain, USN was speculated at first to be launching with Anchor-beating APYs, but since launch, has been providing a less appealing 10%.
Regardless, Near’s ecosystem is growing and should be considered a viable L1 alternative:
It’s likely that stablecoins will be the first crypto assets to become fully regulated – and taxed – in the UK and US, and it will be interesting to see what effect this has on the wider marketplace. Perhaps they will form an effective on-ramp to web3 for web2 organisations. It remains to be seen.
Much like with non-crypto and crypto-specific passive income, savvy investors can incorporate both stablecoins and tokens, NFTs and cryptocurrencies into their staking portfolios to diversify their risk and reward potential.
Ideology vs practicality
Banks lend out your money to earn interest, a very small amount of which they pay back to you with near-0 transparency around how the process works. Even investment platforms often require a great deal of trust, paperwork, fees and middle management.
The web3 ecosystem, on the other hand, more fairly rewards and benefits participants.
A large part of the Decentralised Finance (DeFi) movement centres on the eponymous decentralisation piece; enthusiasts are not keen to simply recreate the challenges of the existing financial system on-chain.
True decentralisation empowers the individual and removes power structures that have typically exploited the individual, ushering in a freer society that is trustless and rewarding through ability to earn for all.
Unfortunately, in the eyes of some, centralised exchanges, projects, protocols and more continue to receive the benefit of the doubt and the most mainstream media coverage; there is an inherent distrust in decentralisation, even when there is no need for trust at all. The blockchain offers the opportunity for all to be both public and anonymous in a fair and transparent way, and yet change is frightening to some.
Simply having a bank that offers crypto savings accounts is enough for them.
This leads us to the inevitable question and the crux of the issue: is passive income attainable for everyone? Will it ever be?
Fundamentally yes, we believe that thanks to cryptocurrencies and yield-baring activities such as staking, everyone everywhere will be able to create a passive income for themselves, if not today, then soon, as Decentralised Automonous Organisations (DAOs), Non-fungible token technology, innovations like Soulbound Tokens and more come together at the center of social, financial and technological innovation to create a world in which passive income is not just a dream for the few but a reality for the many.
Tying it together
As mentioned at the beginning of this piece; accessibility remains one of the biggest challenges to mainstream adoption of passive income via staking. If there are still only hundreds of millions of wallet users in a population of over 7.75 billion, of which over 4.5 billion are connected to the internet, we can see that we are still early. Educating our peers, colleagues and friends about the nature and benefits of creating a passive income via staking is vital, especially in times of economic strife such as we’ve been experiencing since the outbreak of the pandemic in March 2020.
Universal Basic Income examples around the world
We know that governments around the world are actively engaged in creating Central Bank Digital Currencies (CBDCs) and indeed, some have launched already.
We know also that Universal Basic Income is being trialled in some areas, such Wales, Finland and the State of California.
Predicting the future
It seems likely, to this writer at least, that CBDCs and Universal Basic Income will come together to create a centralised platform for citizens of the world to receive both passive and active income directly from the government. This has a number of socio-political and economic connotations and implications that will be wildly polarising in an already polarised world, but it serves to demonstrate two things:
- the central authorities can see and acknowledge the power of the blockchain
- We are still early, pre-regulation in most countries, and big change will no doubt come in the future
With the launch of things like Lens by Aave, perhaps we will see a blurring of on and off-chain life that incorporates credit scores, social scores, free money, earned money, active income and passive income in a way that some people will love and others will love.
It is our belief that informed decision-making is vital at all times and in all things, so a commitment to educating this emergent market, and a responsibility to help others learn about the opportunities on offer when it comes to staking and passive income creation is a natural value that we hold.
Even mid-2022, it is still acceptable for critics and sceptics alike to say that don’t “get” the nature of the new kind of money, and whilst that is frustrating, it’s our duty to inform and educate where we can, and one of the best ways to do that is with data.
StakingRewards.com is the leading provider in this regard and should be considered the first port of call for any would-be passive income enthusiast. The launching soon page alone is enough to demonstrate that this is an exciting space that continues to deliver.
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