How Staking Rewards Work: All You Need to Know

Have you ever lent your financial capital to an institution and expected nothing in return? Perhaps if you are dealing with a charitable organization.    In the regular course of business, an institution that borrows capital offers something in return, usually in the form of interest or dividend payment.   Blockchain technology operates similarly.   Blockchains operate through a decentralized network of computers. These participants must put up computer infrastructure and deposit cryptocurrency. Through the staking consensus mechanism, this decentralized network will then go on to validate transactions on the blockchain.    To entice these participants, called stakers or validators, a blockchain network will offer staking rewards. These serve as a vital marketing tool that attracts stakers and other participants to a blockchain project.    In this article, you will learn about:  

• How staking rewards work 

• How often rewards are paid out

• What cryptocurrencies offer staking rewards

  And much more!   Let’s dive in…

How Staking Rewards Work

When cryptocurrency and Bitcoin first began, anyone could mine the cryptocurrency from their laptop or home computer. This mining process under the Proof-of-Work (PoW) consensus mechanism grew exponentially difficult over time.   In today’s environment, industrial players have centralized mining, removing participation from solo miners and defeating the core blockchain principle of decentralization. These corporate entities put up millions in capital to capture returns from Bitcoin mining.   Modern networks use staking-based consensus mechanisms such as Proof-of-Stake and Decentralized-Proof-of-Stake as an upgrade over the energy and capital-intensive Proof-of-Work.   Staking lies at the center of the modern-day blockchain industry and enables everyday individuals to participate in keeping the network secure.   Crypto staking allows participants to validate transactions and add new blocks to the blockchain based on the amount of cryptocurrency they put up as collateral. In return for their participation, these stakers earn rewards and receive a share of the transaction fees.   The staking yields are typically paid out in the same cryptocurrency being staked.    For example, if you are Staking Ethereum (ETH), you will earn rewards in the form ETH. This allows stakers to accumulate more of the cryptocurrency they are already holding, potentially increasing the value of their investment over time.

Why are Rewards Important

While the staking process opens up the transaction validation process to more participants, the process still requires significant financial investment.    A solo staker on Ethereum would need equipment worth $1,000 to $2,000 and 32ETH ($110,000 as of writing) in required staking capital. Unless you are a passionate blockchain enthusiast and well-off, you will probably not provide this for free.   Technological enhancements such as Decentralized-Proof-of-Stake and Liquid Staking have further broken down these high capital barriers. To learn more about these concepts, make sure to read up on our guides.   Staking yields act as an incentive to stakers who choose to participate in the Proof-of-Stake blockchain network. With thousands of networks in the blockchain space, it can become difficult for networks to attract users. High returns and generating yields can entice participants to these newer networks.

How Often are Rewards Paid

Earnings are paid out regularly, such as hourly, daily, or weekly, depending on the specific cryptocurrency and staking platform.    Take a look at the following examples:

Ethereum Cryptocurrency Staking

Ethereum is the largest Proof-of-Stake network, with $105 Billion in staked digital assets as of writing. The network pays earnings every 6.5 minutes. This is the standard time as a solo staker. However, using a third-party staking platform could change the payout frequency.   Coinbase, a crypto exchange, offers Ethereum staking as part of its passive income services. Investors receive their ETH earnings every 3 days.  

Solana Crypto Staking

Solana, the largest Delegated-Proof-of-Stake (DPoS) network has accumulated $46 Billion in staked SOL tokens. The network sends out earnings approximately every 2 days.   This payout frequency is consistent even with Solana liquid staking platforms such as Marinade Finance.

How are Crypto Staking Earnings Paid?

While we have already discussed the payout frequency for staked tokens, there are other intricacies that stakers should be made aware of.    Here are a few that come to mind:

Which Tokens Act as Rewards

Stakers may receive crypto assets different from the native tokens on the network. This is especially true if a staker engages in more innovative forms and staking pools.   A staker could receive liquid staking tokens and native protocol crypto assets as earnings.   Going back to Marinade Finance, an investor receives staking rewards in the form of mSOL (the platform’s liquid staking token) and MNDE (the platform’s native token).   

Where are Rewards Sent

Rewards will arrive in a location depending on your chosen staking method.   Solo staking and staking with decentralized applications require the usage of a non-custodial wallet. These can be accessed through decentralized cryptocurrency wallets such as MetaMask or Phantom Wallet.   For those who choose to stake with crypto exchanges, then you will receive your rewards in your exchange account.

Strategies to Maximize Rewards

Many investors think that maximizing staking is simply choosing the network with the highest yields. This is merely half the battle.   Before engaging in any staking activity, an investor must first perform due diligence and practice risk mitigation techniques.

Diversify Staking Crypto

Crypto prices can go to zero, resulting in a complete capital loss for stakers. It does not matter if it's a cryptocurrency that supports staking or even a stablecoin, deemed to be the less risky of crypto as it's designed to be non-volatile.   Earning rewards will not mean anything if the prices of the rewards and the staked assets become worthless.   Instead of staking 100% of your assets into a single network, spread it across various ones. That way, capturing varying returns will protect your portfolio from large losses.

Compound Your Crypto Assets

Albert Einstein once called compound interest the “8th Wonder of the World.” It is akin to rolling a snowball down the hill. It just gets bigger and bigger.   Compounding your staking earnings could lead to higher yields later on. Explore staking pools and platforms to take advantage of this financial wonder.   Lido Finance, the top liquid staking platform for Ethereum, does not require minimum staking capital. Thus, a staker could theoretically keep rolling over their earnings into the staking pool.

Conclusion: The benefits of Staking Rewards for Crypto Investors

Staking rewards let token holders earn passive income from their crypto portfolio. At the same time, crypto investors are enticed by this yield and are encouraged to participate in the broader blockchain space. Network participants process transactions and keep the blockchain decentralized and secure. Without staking rewards, perhaps staking would cease to exist and the blockchain industry evolution would be hampered. While it has taken years for crypto staking to reach the state that it is in today, investors are sure to be glad for this opportunity to earn passive income and yield on their digital assets.     At the very least, reflect on your personal risk tolerance.

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