Cryptocurrency staking empowers users to earn rewards by holding coins for a certain period of time. To show what staking rewards you could potentially earn, staking providers typically use the term annual percentage yield (APY). Let’s find out what it means, why APY can change while staking, and how it could impact your activity.
What is APY and how is it calculated?
APY indicates the rate of annual return, including compounding interest earned during a specified period. In turn, compound interest includes interest earned from the initial capital, plus the interest earned on that interest. In order to understand how APY is calculated, let’s take a look at the following example.
Assume you stake $2,000 worth of crypto at a 10% annual interest rate. However, staking rewards are paid every month, meaning there are 12 staking periods in a year.
To find out what your total balance would be after the first month, you can use this formula:
Current stake × (1 + (Annual interest rate / Number of staking periods during a year)
$2,000 × (1 + (10% / 12) = $2,016.67
With compound interest, staking rewards are paid on the interest you accrued in the previous periods. It means the “current stake” for the second month’s calculations would be $2,016.67.
$2,016.67 × (1 + (10% / 12) = $2,033,47
Following these calculations, you would eventually have $2,209.43 in your balance after all 12 months. Now we can calculate the staking APY:
$2,209.43 / $2,000 – 1 = 0.1047 or 10.47%
As you can see, the APY is higher than the initial 10% annual interest rate, because of compound interest every month. Moreover, you could earn an extra $9.43, because if there was a simple interest rate and one payment at the end of the year, you would have just $2,200 (2,000 × (1+ 10%)).
If you want to calculate potential staking rewards for assets available on CEX.IO, you can use our rewards calculator on the Staking page.
What factors affect staking APY?
Annual percentage yield is a key metric to compare potential staking rewards between assets and staking providers. Each cryptocurrency network has its own rates and staking periods. Staking providers may follow the rules set by the cryptocurrency network, or set their own staking periods and interest rates, depending on the services they provide.
In the example above, APY was fixed over the entire year. But in reality, staking APY may change from one staking period to the next. That is why staking rewards are sometimes called potential or estimated rewards, while APY may be called estimated annual yield (EAY).
The approximation exists because it is impossible to provide a precise number, and there are many factors that affect staking rewards. A number of these do not depend on the individual staking the assets. These factors can be divided into three types: network-related, validator-related, and platform-related.
- The network protocol sets what number of tokens stakers will receive for their contribution. This number can be fixed or vary over time.
- The network governance decisions may alter staking periods and rewards, or set new rules for staking.
- The network activity, i.e. the number of stakers and total coins staked, can affect the reward a validator will earn at the end of the staking period.
- Unexpected events may affect the network status and performance.
- Validators’ staking power may change over time. Staking power can depend on the number of coins delegated to the validator, and how strong the validators’ servers are.
- The staking power of one node may affect the staking power of another node.
- Validators may change conditions for delegators depending on the node performance and staking power.
- Delegators may earn lower staking rewards if the validator misbehaves during the staking period.
- The platform may select another validator for staking, or the staking power of the platform’s node may change over time.
- The number of compounding periods may differ depending on what platform you use.
- The platform may change conditions for users, or implement additional features for stakers.
- The platform may run special offers for stakers to encourage users’ participation in staking.
Keep in mind that network-related factors affect staking APY for all stakers, while validator and platform-related factors are more local. However, the changes in staking APY are still a combination of different factors, and staking rewards can increase or decrease in different staking periods. It is one of the reasons why staking providers may display APY as a range.
In addition, staking rewards are typically not added to investors’ staked balance, which may require additional actions to benefit from the compounding interest. However, CEX.IO users can take advantage of automated balance replenishment and receive staking rewards in their CEX.IO balances automatically. This empowers users to earn more staking rewards with consecutive staking periods, without additional actions.
For information purposes only. Not investment or financial advice. Seek professional advice. Digital assets involve risk. Do your own research.