How Annual Percentage Returns (APR) Staking Works
A good way to make money while you are “hanging” on your cryptocurrency during a bear market is to stake your cryptocurrency to earn more cryptocurrency. Staking is a type of way to make money for people who have chosen not to sell their cryptocurrency holdings for the foreseeable future. It is like investing in an FGN savings bond or commercial paper, but in this case you are investing in a crypto asset in the hope of getting more cryptocurrency.
Staking is how many cryptocurrencies verify their transactions, and it allows participants to earn rewards on their crypto holdings while contributing to the overall integrity of the blockchain in question. Cryptocurrency staking is a process of committing your crypto assets to support a blockchain network and confirming transactions.
The ability to stake your crypto is available with cryptocurrencies that use the proof-of-stake (PoS) model to process payments. Due to climate activities highlighting how harmful mining cryptocurrencies are to the environment, PoS has become a more energy-efficient alternative to the original proof-of-work (PoS) model that Bitcoin runs on.
Why APR Matters
When staking cryptocurrency assets, the APR (Annual Percentage Rate) is one of the most crucial factors to consider for optimal efficiency. The staking reward globally includes inflation revenue and transaction fee distribution.
In staking cryptocurrency and with everything else in life, users always tend to opt for whichever is the safest, most efficient, and most profitable route of investment. The APR, the Annual Percentage Rate, is the most intuitive and important key element of staking, as it presents the amount of interest a user would receive for the bond asset in one year.
APR should not be confused with Annual Percentage Yield (APY). The annual percentage yield is the amount or percentage interest rate, including compound interest on an amount. Since APY calculates all compound interest and its frequency, it is also called the absolute interest rate. Basically, APY tells you exactly how much you receive in a year while APR does not.
How APR is calculated
As mentioned earlier, APR does not necessarily mean that is the return you will get at the end of a year. This is because of the way the APR is calculated. Simply put, your staking APR is calculated as follows: [Inflation * (1-Community Tax)] / Ratio of linked tokens. let’s look into the details.
To fully understand the APR calculation, we must first understand what the annual retainer and inflation are. In simple terms, the annual provision is the number of blocks increased on a blockchain in a year. Its formula is: Annual Supply = (Total Current Supply) * (Inflation Rate)
The annual inflation rate is the ratio of the number of blocks increased in one year compared to the previous year. The inflation rate reacts to the ratio status of the bond tokens, which means that the inflation rate is constantly changing without being noticed. Some channels do not show you the annual inflation rate directly through the channel parameters, however, if we have the total supply and the annual supply, we can derive the inflation rate with a simple division calculation.
According to the operation of the inflation rate, the number of blocks to be provided in one year is decided with an annual provision. For example, let’s say the current supply of a token is 1,000 and the inflation rate is 10%, that means the annual supply would be 100 tokens. These 100 tokens will now be distributed to staking users as a reward, based on the network’s linked token ratio. Basically, in APR staking, inflation-linked interest is distributed from the block’s annual provision to staking users.
Besides inflation and annual provision, there are other factors to consider such as community tax and bond token ratio. Community tax, in most cases, is relatively low, for example 2%. Next, we need to consider the linked token ratio, as the reward is only granted to those who have actively staked their assets, not to those who have not. The linked token ratio can be simply calculated: linked tokens divided by total supply.
So far, what we have discussed above is how the nominal APR is calculated, theoretically. On the other hand, there are a few other things behind the scenes that we need to take into consideration for the actual APR calculation: Actual Staking APR = (Nominal APR) * [(Actual Annual Provision) / (Annual Provision)].
The first thing to consider is the block hitting speed. The actual observed speed of the hit blocks may be slower than the estimated/predicted value (annual forecast) due to the uncertainty of the network operability. Another thing to consider is the validator commission. Whatever APR you have, nominal or real, multiply (1 validator commission) for the final real staking APR. Validators offer a variety of commission rates, so users can select their preferred validators for an optimized portfolio.
- In conclusion, the APR briefly gives you an idea of the value of staking. The actual APR is slightly lower than the nominal APR listed, as there are other factors to consider as noted above. Due to these constantly changing factors, the APR rate will constantly change and may differ for different investors.
- During what many are calling crypto winter, due to the market downturn we’ve seen so far in 2022, strong-believing investors and holders with bad portfolios are urged to stake their cryptocurrencies so that they can earn passive income against the next big jump in price.
- Those new to the fold should keep in mind that Bitcoin and other cryptocurrencies are extremely volatile. Therefore, the amount of interest you earn may vary. Crypto lending programs are attractive to investors who want to hold their coins for the long term. Therefore, passive income will add value to their portfolio. However, any change in the price of the cryptocurrency would impact their earnings.