Staking Yield Analysis
APY vs APR
To understand staking yields, you first need to know the difference between APY and APR.
APR (Annual Percentage Rate)
Annual yield based on simple interest
- Does not include compounding effect
- Simple annualized calculation
- Example: 1% monthly interest = 12% APR annually
APY (Annual Percentage Yield)
Annual yield based on compound interest
- Includes compounding effect
- Closer to actual returns
- Example: 1% monthly compound = 12.68% APY annually
Calculation
APY = (1 + APR/n)^n - 1 n = compounding frequency (per year)
| APR | Compounding Frequency | APY |
|---|---|---|
| 10% | Annually | 10.00% |
| 10% | Monthly | 10.47% |
| 10% | Daily | 10.52% |
| 10% | Continuous | 10.52% |
In staking:
- Ethereum: Rewards every epoch (~6.4 minutes) → Near-continuous compounding
- Solana: Auto-compound every epoch (~2 days)
- Cosmos: Manual claiming → Depends on claim frequency
Sources of Staking Rewards
1. Token Issuance (Inflation)
Most PoS chains issue new tokens to reward stakers.
Example - Ethereum:
- Annual new ETH issuance of about 0.5~1%
- This ETH is distributed to stakers
Meaning of Inflation:
- Non-stakers: Stake gets diluted
- Stakers: Dilution protection + additional rewards
2. Transaction Fees
A portion of gas fees paid by users goes back to stakers.
Ethereum:
- Base fee: Burned (EIP-1559)
- Priority fee (tip): Goes to validators/stakers
Fee Proportion:
- Higher when network activity is high
- Significant portion of rewards on Ethereum
3. MEV (Maximal Extractable Value)
Additional revenue from transaction ordering manipulation.
- Block proposers receive some MEV
- Distributed via MEV-Boost, etc.
- About 10~20% of Ethereum staking rewards
Nominal Yield vs Real Yield
Nominal Yield
The apparent yield displayed by the protocol.
"Solana staking APY: 7%"
Real Yield
The actual purchasing power increase considering inflation.
Real Yield = Nominal Yield - Token Inflation
Calculation Examples
Solana:
- Nominal APY: 7%
- Annual inflation: 6%
- Real yield: 7% - 6% = 1%
Cosmos (ATOM):
- Nominal APY: 18%
- Annual inflation: 13%
- Real yield: 18% - 13% = 5%
Ethereum:
- Nominal APY: 4%
- Annual inflation: ~0.5%
- Real yield: 4% - 0.5% = 3.5%
Why Real Yield Matters
Scenario: ATOM Staking
- Attracted by 18% APY, invest $10,000
- After 1 year, token quantity: $11,800 value
- But total supply increased 13% due to inflation
- Network stake ratio only slightly increased
- Actual "wealth increase" is ~5%
For Non-Stakers:
- Only hold tokens, don't stake
- After 1 year, stake ratio diluted by 13%
- Effectively a loss
Chain-by-Chain Yield Comparison
Approximate 2024 Figures
| Chain | Nominal APY | Inflation | Real Yield | Notes |
|---|---|---|---|---|
| Ethereum | 3~4% | ~0.5% | ~3% | Low inflation |
| Solana | 6~8% | ~5~6% | ~1~2% | Gradual inflation decrease |
| Cosmos | 15~20% | ~10~13% | ~5% | High inflation |
| Polkadot | 12~15% | ~7~8% | ~5% | Medium |
| Cardano | 4~5% | ~2% | ~2~3% | Low inflation |
| Avalanche | 8~10% | ~7% | ~2% | Fee burn effect |
Analysis
Ethereum:
- Low nominal APY but low inflation
- Can even be deflationary due to EIP-1559
- Excellent in terms of real yield
Cosmos:
- High nominal APY
- But also high inflation
- Rapid dilution if not staking
Solana:
- Inflation decrease schedule (15% annual decrease)
- Expected improvement in real yield long-term
Yield Fluctuation Factors
1. Staking Ratio
APY changes based on the percentage of total supply that is staked.
- High staking → More reward recipients → Lower APY
- Low staking → Fewer reward recipients → Higher APY
Ethereum Example:
- 20% staking ratio → APY ~5%
- 30% staking ratio → APY ~4%
- 50% staking ratio → APY ~2.5%
2. Network Activity
Since transaction fees are part of rewards:
- High activity → More fees → Higher rewards
- Low activity → Fewer fees → Lower rewards
3. MEV Environment
- More DeFi activity and arbitrage opportunities means more MEV
- Additional revenue for block proposers
4. Protocol Updates
- Inflation schedule changes
- Fee structure changes
- Reward distribution mechanism changes
Liquid Staking Yields
Compared to Basic Staking
Liquid staking has protocol fees deducted.
| Item | Direct Staking | Lido | Rocket Pool |
|---|---|---|---|
| Base APY | 4% | 4% | 4% |
| Protocol Fee | 0% | 10% | ~14%* |
| Net APY | 4% | 3.6% | 3.4% |
*Rocket Pool: Node operator fee + protocol fee
Additional Yield Opportunities
Participating in DeFi with LSTs can generate additional yields:
- Base staking rewards: 3.6% (stETH example)
- DeFi additional yields:
- Collateral utilization: Borrow and deploy
- LP fees: Curve stETH/ETH pool
- Incentives: Protocol token rewards
Total Yield = Staking + DeFi
However, risks also increase:
- Depegging risk
- Liquidation risk (with leverage)
- Smart contract risk
Compounding Strategies
Manual Compounding
Claim rewards and restake yourself.
Considerations:
- Gas fees vs compounding effect
- Need to calculate optimal compounding frequency
Example (Ethereum):
- Staking amount: $10,000
- APY: 4%
- Gas fee: $5/transaction
Daily compounding: Gas fees exceed compounding gains (loss) Monthly compounding: Appropriate level Quarterly compounding: Gas savings, reduced compounding effect
Auto-Compounding
Some protocols/chains automatically apply compounding.
Solana:
- Auto-compound every epoch
- No additional action needed
Cosmos:
- Manual claiming required
- Can be automated with Restake app, etc.
Yield Calculation Tools
Websites
- Staking Rewards: Chain-by-chain staking yield comparison
- DefiLlama: LST and DeFi yields
- Dune Analytics: Detailed on-chain data
Manual Calculation
Token quantity after 1 year:
Final quantity = Initial quantity x (1 + APY)
After n years:
Final quantity = Initial quantity x (1 + APY)^n
Dollar value (considering price changes):
Dollar value = Final token quantity x Future price
Yield Traps
1. Don't Just Look at APY
High APY ≠ Good investment
Checklist:
- What is the inflation rate?
- What is the token price outlook?
- Is the protocol sustainable?
2. Ignoring Inflation
Even 100% APY with 90% inflation is only 10% real.
It's an advantage over non-stakers, not absolute wealth increase.
3. Ignoring Price Fluctuation
Scenario:
- ATOM staking 18% APY
- After 1 year, tokens increased 18%
- But ATOM price dropped 50%
- Dollar-based loss: ~40%
Staking rewards don't offset price drops.
4. Overlooking Taxes
In many countries, staking rewards are taxable.
- Income tax at time of receipt
- Capital gains tax when sold
- Need to calculate after-tax real yield
Yield Optimization
1. Focus on Real Yield Selection
Compare using real yield, not nominal APY.
2. Compounding Optimization
Find the balance point between gas fees and compounding effect.
3. LST Utilization
Combine staking rewards + DeFi yields.
4. Diversification
Diversify across multiple chains/protocols to:
- Spread risk
- Multiple revenue sources
- Reduce dependence on specific chains
5. Market Timing
- Bear market: Lower staking ratio tends to increase APY
- Bull market: Higher staking ratio tends to decrease APY
Summary
Staking yields should be evaluated by distinguishing APY from APR and looking at real yield (after inflation) rather than nominal yield. Don't be deceived by high APY; consider token inflation, price fluctuation, and taxes. Ethereum has low nominal APY but excellent real yield due to low inflation, while Cosmos has high APY but also high inflation. Liquid staking can add DeFi yields to base rewards, but risks also increase.
Next article: Yield Farming Basics - Getting Started with DeFi Farming