Many investors consider staking cryptocurrencies as a way to earn passive income. However, they often forget to take inflation into account. Many of the largest Proof-of-Stake-based altcoin projects have generated negative real returns for investors over the past year, judging by the inflation and staking rewards data. Crypto expert Stefan Stankovic clarifies this.
What is cryptocurrency staking?
As you follow on Kriptokoin.com, Ethereum’s transition to Proof-of-Stake (PoS) is fast approaching. In this environment, staking emerged in the minds of many investors as a method of generating passive income. Staking refers to the practice of locking the tokens of altcoin projects for a certain period of time to secure and support the operation of Blockchain networks using a PoS consensus mechanism.
Unlike PoW-based cryptocurrencies such as Bitcoin, where miners spend large amounts of electricity to verify transactions and secure the network, in PoS systems, validators lock cryptocurrencies as collateral to perform the same functions. In turn, both PoW miners and PoS stakers receive coins as a reward for their service.
It is possible for both mining and staking to be profitable. Many investors consider it a more desirable way to allocate capital as it allows them to earn a steady income without needing to purchase, operate and maintain any mining equipment. However, many investors make the mistake of considering only nominal stake returns when deciding which altcoins to stake, rather than digging deeper.
Specifically, investors often forget to control the inflation rates of the tokens they plan to stake, which has an impact on the asset’s real rates of return. In other words, if staking a token yields double-digit returns per year, but the token has an emissions program that results in a high inflation rate, real rates of return may be lower than expected, or even negative.
ETH returns of leading altcoin Ethereum after Merge
Using current and historical data from CoinMarketCap and Staking Rewards, it is possible for traders to accurately predict the annual inflation rate of the top 10 PoS altcoins. That way, it’s pretty easy for them to find their current stake returns. Using these metrics, it is possible to calculate real stake returns for each asset.
For example, according to CoinMarketCap data, the circulating supply of Ethereum on September 7, 2021 and September 7, 2022 stood at 117,431,297 and 122,274,059, respectively. This brought the network’s inflation rate to roughly 4.12%. Staking Rewards data shows that the annual reward rate for indirectly staking Ethereum via staking pools is 4.04%, which means the real return for staking is -0.08%. This means that anyone who thinks they’ve made a 4.04% return through staking has had their returns diluted by the network’s token emissions over the past year.
Ethereum’s negative real rate of return looks bad on the surface. However, other Layer 1 PoS coin holders do even worse. Moreover, after completing Ethereum Merge, ETH issuance will decrease from around 13,000 ETH to 1,600 ETH per day. This will reduce Ethereum’s inflation rate from about 4.12% to about 0.49%. According to data from Ultrason.money, if Ethereum’s gas price stays the same as last year’s average, ETH will become deflationary after Merge. It will also shrink its total supply by about 1.5% per year. Additionally, Ethereum’s nominal return will likely increase to around 7%. This will increase the real annual return after Merge to approximately 8.5%.
Is it always worth it?
Besides Ethereum, seven of the nine largest PoS altcoins have generated negative real returns for investors over the past year. Cardano, Solana, Polygon, TRON, Avalanche, Cosmos and NEAR had negative real returns over the past year. The worst of the group was NEAR, with an inflation rate of 73.34% and a nominal return of 9.75%. This puts its real yield at -63.59%.
TRON’s real return is -25.34%. It is followed by Avalanche with -25.23% and Polygon with -17.75%. Solana’s real rate of return is currently -14.38%. Cosmos’ rate is -11.7% and Cardano’s rate is -3.09%. Based on the data, most PoS cryptocurrency stakers have actually lost revenue over the past year due to aggressive token emission schemes, rather than passive income.
The most profitable altcoin projects to bet on
Based on the same methodology, only two of the top 10 PoS altcoins have delivered positive real returns for stakers over the past year. Meanwhile, BNB provides by far the highest ree returns for stakers. BNB currently has a negative inflation rate of -4.04%. This means that its circulating supply has shrunk over the past year. It therefore offers nominal returns of around 4.24%. This increases the real rate of return for BNB stakers to around 8.28%. That makes it roughly the same as Ethereum’s post-Merge projected return.
Polkadot also provides real returns for punters. DOT’s circulating supply increased by 12.83% compared to last year. The annual rate of return is currently around 13.9%. This puts the real rate of return at 1.07%. Here are the real rates of return for the top 10 PoS altcoins over the past year:
- BNB (BNB): 8.28%
- Polkadot (DOT): 1.07%
- Ethereum (ETH): -0.08%
- Cardano (ADA): -3.09%
- Cosmos (ATOM): -11,07%
- Solana (LEFT): -14.38%
- Polygon (MATIC): -17.75%
- Avalanche (AVAX): -25.23%
- TRON (TRX): -25.34%
- Near Protocol (NEAR): -63.59%
Final thoughts on altcoin staking
The data above shows that high nominal stake rates do not necessarily translate into high real returns. This is why stake rates should not be the only consideration for investors looking to own an asset. More importantly, it is possible for crypto market volatility to affect real returns. Because even if an altcoin earns returns via staking, it is likely to see a 70% drop in the bear market. In this case, the total net return turns negative.
Finally, readers should be aware that altcoin prices are a supply and demand factor. So if the supply of an altcoin increases by 30% per year, the demand for it must increase at the same rate for the price to stay the same.
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