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Cryptocurrency investors should be staking at least one of their coins, take the yield, and let it ride. For retailer investors who are up on all the lingo, “staking” is like locking up money in a high risk investment, for the promise of interest payments over the lock-up period. Private equity does this. And of course, everyone has heard of bank CDs. The risk, of course, is that your staked crypto can lose 90% of its value in about a year.
Staking is best for long crypto investors, who are not active traders. If that is the case, keeping some of those coins tied up through staking and even the new trend of restaking will put that digital money to work.
“The primary difference lies in what's being held and where. In staking, you're holding cryptocurrency in a digital wallet or a staking pool, not a bank, and participating in the economic and security operations of a blockchain network rather than just saving money,” said Dheeraj Borra, co-founder of Kelp DAO, a liquid restaking platform with $1.04 billion in assets currently being staked there. “The reward you get is similar to an interest rate payment; it compensates for the opportunity cost of locking up your cryptocurrency and for participating in network security and operations,” he said.
Kelp DAO raised $9 million from investors like crypto fan Tim Draper of Draper Dragon in late May as it builds out its war chest for the new world of digital finance. Kelp DAO’s restaked Ethereum (rsETH) is a top six restaking coins by market cap.
Staking requires the proof-of-stake consensus, a method used by some blockchains to select participants and verify new data being added to the network. These participants are referred to as validators in the crypto lingo, or “stakers” – which is more commonly known to investors. They purchase and lock away their coins to keep the blockchain active and secure. Staking is your “skin in the game” in that particular blockchain.
Sometimes you need to stake on the blockchain’s own digital wallet to earn a higher yield. Algorand (CRYPTO: ALGO) does this. It pays around 4.7% annually. Other times you can do it directly from a retail brokerage account like Coinbase. Usually, the exchange will take a cut.
Sort Of Like The Crypto Junk Bond Market
Staking is sort of like the crypto version of the junk bond market. These are already high-risk investments. So keeping your money locked should only come with high payouts. Some of the biggest yields in the market at the moment are:
Injective Protocol (CRYPTO:INJ): 19.14%
Casper Network (CRYPTO:CSPR): 12.42%
Kusama (CRYPTO: KSM): 11.81%
Polkadot (CRYPTO: DOT): 11.50%
SKALE Network (CRYPTO: SKL): 11.45%
Avalanche (CRYPTO:AVAX): 8.02%
Tezos (CRYPTO: XTZ): 5.89%
The above numbers do not count for inflation. Data comes from Staking Rewards.
“Investors don't have to specify how long they'll stake their tokens. You can stake for as long as you want. There's no penalty for early withdrawal, though there may be a delay in getting your tokens back,” said Xiaohan Zhu, co-founder of Sumer.money, a synthetic assets and money market platform backed in part by Pantera Capital. In 2013, Pantera created the first blockchain hedge and venture funds in the United States. “The rewards (or yield) depend on the total number of tokens staked by everyone, meaning that if more tokens are staked, the annual percentage yield decreases,” Zhu said.
The “New Staking”, Best Known As Restaking
Restaking lets investors stake the same tokens on multiple blockchains. Restakers receive higher yield for undertaking this multi-chain risk, but not much more.
Restaking is a resource management approach to decentralized staking pioneered by the startup known as EigenLayer. The company raised $100 million from Andreessen Horowitz in February. Restaking is more advanced and is attracting venture capital, probably more than it is attracting your average Bitcoin investor. Most retailers will stick to traditional staking.
Restakers are holding Liquid Restaking Tokens (LRT). Think of the LRT as the Wall Street version of a staking coin derivative. Many new projects are propping up to explore the best ways to use restaking and investors are looking for more yield for the risk, as Reuters reported recently.
“It all just started last year as more Ethereum (CRYPTO:ETH) holders sought stable returns,” said Zhu. “Restaking helps new networks quickly gain security and benefits investors by maximizing returns.”
The biggest restaking crypto is the Lido Staked ETH (stETH), with a current market cap of roughly $33 billion. Still, with an APY of just 3.3% it depends on whether investors believe ETH is going to keep rising and not wipe out yield payments.
Most of the restaking coins are held by developers, thinks Alon Muroch, founder of SSV Labs (CRYPTO:SSV).
“Restaking is our core business at the moment and during last two years we had around 50 grantees (developer teams) we allocated just under $3 million to build various applications and tooling for our network,” he said. “This year we are already over 20 grantees many of them restaking protocol companies that are using our infrastructure. But overall, I'd say both speculators and developers constitute a good chunk of the tokens in circulation. The majority of SSV coins is being used by the validators to pay operator fees, and not really held by investors.”
SSV was priced at $4.92 on June 21, 2022 and is currently worth about $40.
On Thursday, Coinbase said it will list restaking protocol EigenLayer for pre-launch trading.
EigenLayer enables ETH holders to re-stake their tokens on blockchains other than Ethereum, in return for awards (or yield). If an investor staked $100 of ETH for 10 years at a rate of 5%, they would have $127, Benzinga editor Emily Lew reported on June 20. But if they staked it across 2 protocols -- or restaking -- for 10 years at the same rate, they would have $154.
The writer of this article stakes Polkadot and used to stake Algorand, but sold that position last year.
This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.
