When it comes to earning crypto rewards, staking is believed to be one of the most beginner-friendly options. Essentially, users just need to allocate their funds to a specific wallet to be eligible for rewards with a certain asset.
However, the devil is in the details, and you can describe numerous other services that offer crypto rewards in the same way. That is why unprepared users could get lost in an ocean of opportunities, make hasty decisions, and experience an imbalance between effort and received rewards.
In this article, we outline some tips that could be useful when exploring staking services. With them, you may avoid some basic mistakes and potentially boost your staking annual percentage yield (APY).
Make sure that the APY you see is related to staking
If you want to stake crypto using crypto exchanges, you are likely to encounter Earn services. They typically include staking and other ways to generate crypto rewards. For instance, at the moment of writing, CEX.IO Earn features Automated staking, Staking, and Savings services.
All CEX.IO Earn services are divided into corresponding categories and provide a set of assets with different APYs. Furthermore, CEX.IO runs validation nodes on a variety of networks, empowering users to directly delegate tokens and enjoy relatively high staking rewards.
Note: all validators receive the same staking rewards, depending on the current network APY, and the validator’s staking value. The only difference could be in fees that validators charge delegators.
This means that if you see an APY that is higher than the current staking APY within the network, this service may not be related to staking. In the case of using crypto exchanges, these could be savings, yield farming, or dual investment services.
Distinguish what’s included in the Earn service
When staking, users support the blockchain network, helping validate transactions and taking part in the network’s governance. For their contributions, users receive a proportional reward during established staking periods. At the same time, savings, yield farming, and dual investments are not related to the network operation, and generate rewards in ways different from staking:
- Savings — This typically implies lending tokens to the platform/protocol/other users to earn interest rewards.
- Yield farming — Providing liquidity to liquidity pools in order to earn a percentage of trading fees or governance tokens associated with the yield farming platform. The term could be also used to describe lending via decentralized finance (DeFi) platforms.
- Dual investment — Options, or providing the right to buy/sell assets on a set date. Users earn a premium for providing this right.
These services carry different levels of risk. Understanding what activity your funds will participate in is crucial to evaluating a risk/reward ratio. That is why you should assess the specifics of the service before using it.
Why is clarity important?
While CEX.IO is dedicated to being transparent about its Earn services, other platforms may mix different services that can create user confusion.
Example trick: Services mentioned above may offer a higher APY compared to staking. Crypto platforms may “show bigger numbers first” to attract customers. In some cases, it may not be clear what services users’ funds will participate in, because users can only choose APY and/or a term of allocation.
At the moment of this writing, the average staking APY within the Tron (TRX) and Polygon (MATIC) networks are 3.5% and 5.5%, respectively. What services might these numbers reflect?
As a result, unprepared users who come to earn staking rewards may end up participating in another service with potentially higher risk. Alternatively, users may confuse staking with other services, having a false impression of the staking process.
Don’t choose a staking asset based on APY
The crypto market contains hundreds of cryptocurrencies that support staking. Many of them have different rules and conditions, providing users with a certain staking APY. However, this APY is not fixed and may change from one staking period to the next.
There are many factors that can impact APY, and some of them are independent of the individual staking the assets. For instance, staking ratio (the percent of eligible coins that are being staked), network governance decisions, changes in validators’ staking power, etc., are all influences on APY. As a result, if you see a staking APY, this number is merely estimated.
Furthermore, staked coins are used to secure the network. As a result, a lot of networks requirelocking assets for a certain period of time in order to be eligible for rewards. Staking rewards are paid in cryptocurrency native to the network, meaning staking performance is highly dependent on the network/asset performance. Because of that, allocating funds to staking just to take advantage of short-term “high” APY may not work out well in the longer run.
Why could this be important?
Example trick: Imagine a user who has heard about staking, but doesn’t know what to stake. They joined a platform that supports staking and decided to stake an asset with the highest available APY (let’s say 30%). This APY appeared to be promotional on a platform and returned to 15% during the next staking period. At the same time, the asset performed poorly in a short term, and, although staking rewards dampened some losses, the user exited the market.
In this case, the user tricked themselves. Firstly, they selected an asset blindly, deciding to take advantage of a “high” APY. Make sure to check the average staking APY within the network and why the platform may offer a higher rate.
Secondly, poor short-term performance doesn’t mean the asset cannot show gains in the longer term. Staking is typically focused on long-term support of the network and accumulation of crypto rather than “get rich quick” narratives. That is why analyzing market conditions and doing own research must take place before selecting an asset for staking.
Understand the difference between various staking approaches
Staking services are quite diverse and are offered in a variety of ways. For example, on CEX.IO, users can take advantage of automated staking and staking sub-accounts.
- Automated staking — It empowers users to earn rewards monthly just by holding crypto on the balance. Staked funds can be moved anytime, and rewards are distributed automatically to the CEX.IO balance. In addition, tokens that participate in automated staking can be used in trading.
- Staking (sub-accounts) — Rewards are paid daily and have higher staking APY than automated staking, but it requires users to move funds to a dedicated staking sub-account. Funds stored on the sub-account are liquid and can be moved anytime but rewards are not automatically distributed to the CEX.IO balance. It can be done manually. Tokens allocated to the staking sub-account cannot be used in trading.
As such, CEX.IO users can choose between higher APY with staking and more flexibility with automated staking, or combine both methods. Essentially, users can just do a few clicks to increase their APY by using staking sub-accounts instead of automated staking. Both automated staking and staking sub-accounts refer to soft staking.
In addition, you may encounter hard staking approaches where you need to lock funds to be eligible for rewards. This could be done by delegating tokens to a validator via a non-custodial wallet, running a validation node, or taking part in “locked staking” via custodial staking providers. The latter typically requires users to select for how long they want to lock their funds. This may affect the potential staking APY.
When staked funds are locked, they cannot be moved freely and users may need to wait a certain period of time to transfer them elsewhere. This makes the staking process even less flexible but locked staking typically offers higher staking APY.
Why could this be important?
Various staking approaches provide different user experiences. If you want to maximize potential APY, you must be ready that staked funds may not be available for a certain period of time. At the same time, you may sacrifice APY for the increased flexibility of staked funds.
When comparing APY between different platforms, make sure that you compare the same staking approaches (flexible with flexible, locked with locked). Otherwise, you can get the wrong impression about the staking services.
Example trick: Some crypto platforms feature “tiers” in their Earn services. This means APY may change depending on the amount of allocated funds. For example, if you allocate below 1,000 tokens, you may earn 5%. But once you allocate a thousand tokens or more, your APY will drop to 1%. Crypto platforms typically list tiers in a small frame near APY and “show bigger numbers first.” That is why it’s important to read all the details before using the service.
It seems it’s actually not 5.5%, once you deposit more than 1,000 USDT.
As a platform focused on transparency, CEX.IO doesn’t feature “tiers” in its Earn service. This means users earn rewards regardless of the amount of funds they allocate.
CEX.IO doesn’t need to impress users with big numbers, and we don’t practice hidden mechanics with our Earn service. Our platform is laser-focused on providing users with reliable service and consistency of reward distribution. But not all platforms follow this path. Some of them adopt contradictional practices in terms of transparency, attempting to lure users with high APY.
That is why we wanted to highlight these tricks and tips which could come in handy when exploring other areas of the crypto industry. Pay attention to detail and use extra caution when you see APY which looks too good to be true.
Disclaimer: Not investment advice. Seek professional advice. Digital assets involve risk. Do your own research.