Did you know you can earn passive income just by holding cryptocurrencies? Yes, you heard it right. Staking rewards are incentives generated when you lock up crypto funds in a staking platform. No active trading is needed. Simply “HODL” and earn.

So, what are these rewards, and how do you earn them?

This blog explains staking rewards and how they work. Let’s dive in. 

What are Staking Rewards?

Staking rewards are generated through a process called crypto staking.

Crypto staking has emerged as a popular alternative source of income for people who do not want to trade crypto actively, which is time-consuming and requires significant industry knowledge and technical acumen.

So, how does crypto staking work?

In traditional business, you may have heard that a person has a 20% stake in the company shares. But what does it mean?

“Stake” means a share, investment, or ownership in a company’s business, outcomes, profit, or loss.

Similarly, in crypto staking, to stake means to hold or lock up crypto assets for a specific period in a blockchain network, and in return, you earn incentives or returns called “staking rewards.”

In crypto staking, a person “HODLs” or locks up crypto funds to validate transactions or enhance the operational efficiency or security of a Proof-of-Stake (PoS) blockchain network. It is a low-barrier crypto investment and does not require advanced technical know-how.

Crypto staking is considered a lucrative source of passive income in countries like India because it does not require large upfront investments.

How are Staking Rewards Generated?

Actors in crypto staking are called validators. A validator can directly stake (solo-staking), delegate the staking authority to a trusted validator (delegated staking), combine resources in a staking pool (pool staking), or take the help of a third-party staking service provider (Staking-as-a-Service or StaaS).

The staking process begins once you stake or commit crypto assets in a PoS network. Validators are chosen randomly to confirm or validate transactions and add new blocks to the network. In this context, we must remember that your chances of being chosen as a validator depend on how much you stake or commit to the network. The more assets you stake, the greater the chances.

A PoS network sets some rules to protect the network and the validator’s interest. Validators are penalized for misbehaviour, breaking rules, and engaging in fraudulent activities. This penalty is called “slashing.” It ensures that validators and network participants act responsibly and complete their tasks correctly. As punishment, a validator may lose a portion or the entire staked amount, depending on the severity of the action.

Once the transaction is validated, the PoS network distributes the reward to the validator in proportion to the staked amount.

Staking rewards are generated through:

• Newly issued tokens
• Transaction fees

Can you Access Staked Crypto During the Lock-up Period?

No. During crypto staking, the funds are frozen or restricted. This means that the staked funds cannot be moved, spent, or traded until the “unbonding” time or the waiting period is over. You may request to “unstake” the funds, but you must wait before the tokens are fully available for withdrawal. If you unstake the funds early, the rewards are diminished.

An exception to traditional crypto staking is liquid staking. It generates a tokenized version of the staked crypto called LSTs (liquid staking tokens) that can be used simultaneously for trading, buying, selling, or other DeFi operations. This way, the staked crypto is liquidated during the staking process.

How Much Can You Earn by Staking?

It depends on several factors:

• Staked amount: Just like bank interest, your staking rewards depend on how much you have invested or committed to the blockchain network. In other words, the staking rewards are directly proportional to the crypto staked.
• Lock-up period: The staking duration or the time length for which you have locked the funds. If the staking period is longer, this means you have committed your funds for an extended period to promote network operations and security. The network also incentivizes with greater staking rewards.
• Staking rate: It is also known as the “staking yield.” It is the interest rate or percentage of reward generated annually or in one year. The staking rate may vary depending on the staking platform or commission deducted by a third-party staking provider.
• Platform fees: This is the commission or charges that a staking service provider like Lido, Binance, or Coinbase charges for staking services. If you are considering delegated staking, you must deduct a percentage as delegator fees.
• Compounding rewards: These are the rewards generated if you decide to reinvest your staked rewards to maximize returns. This can be done manually or through auto-compounding, depending on the staking platform.
• Price volatility: Just like conventional financial investments, staking is influenced by price volatility. The number of token rewards you earn may remain the same, but the intrinsic fiat value may fluctuate depending on market price fluctuations.

How to Calculate Staking Rewards?

While calculating staking rewards, it is imperative to understand APR and APY.

APR or Annual Percentage Rate is the interest you earn annually at the end of a year. For example, if you stake 100 ETH at 5% APR, you earn 5 ETH as staking rewards after one year.

APY stands for Annual Percentage Yield. It is the compound interest, which is the additional earnings you earn over your initial investments. It is the accumulated interest that you earn when you reinvest your staking rewards. Taking the same example as above, if we stake 100 ETH at 5% APR, we can earn 5 ETH as base rewards and additional rewards as compound interest for reinvesting. So, APR potentially enhances the returns due to the compound interest.  

Note: APR may be described as simple interest, and APY as compound interest.

Based on the APR and APY staking rate, you must calculate rewards. In APR, the calculation is simple, but in APY, you must consider the compounding interest.

Follow these steps:

• Consider the incentive structure and the staking rate.
• Determine the total crypto assets staked.
• The staking duration. If you stake the assets for a year, the rewards will be much more than if you stake for a week or a few months.

Calculating staking rewards may sound overwhelming. Alternatively, use a staking rewards calculator like Figment Rewards Calculator or wallets with an inbuilt calculator like Trust Wallet. You just have to input the total amount staked, rate, and duration, and the calculator will do the rest.

 Source: trustwallet.com

How to Optimize Staking Rewards?

Maximize your crypto passive income following these simple tips:

• Diversify staking portfolio: Instead of putting your crypto funds in a single staking platform, diversify investments in multiple platforms and earn rewards simultaneously.
• Invest in high-yield platforms: Research and identify which staking platform offers greater yields or interest to maximize returns.
• Choose reliable validators: Select trustworthy validators and staking platforms with a good reputation to eliminate slashing or risking your funds.
• Consider reinvesting: To optimize returns, you may consider reinvesting and earning through compound interest.
• Liquid staking: It is an innovative approach that does not lock your funds and frees the liquidity of your assets. You can utilize LSTs in other DeFi operations.
• Do research: Always research the platform and blockchain network and understand the mechanics before investing. Stay informed and up-to-date on market trends, staking rates, and platform fees.
• Stake for the long term: Crypto staking is ideal for people who want to invest long term. If you stake and consistently reinvest staking rewards for a long period, the returns will multiply over time.

Final Thoughts

Staking rewards offer an innovative and smart way to maximize passive income in India with minimal investments and technical knowledge. Numerous Indian staking platforms like WazirX, Coinbase, CoinDCX, along with global platforms like Binance, ByBit, or Kraken, allow effortless staking with attractive rewards. However, it is crucial to be aware of staking risks such as slashing, market fluctuations, or validator uncertainty to maximize long-term returns.