What Interest Rate Are You Really Earning with Staking Rewards?


Staking Rewards: The Importance of Adjusting for Inflation  

Staking rewards can be deceiving. While it's easy to get caught up in the prospect of earning interest, accurate analysis of staking requires considering the inflation of a coin's supply. In other words, we should look at rewards rates that are adjusted for inflation and not base investment decisions on the rewards rates as advertised. StakingRewards.com lists this information for many popular coins. They define the Adjusted Reward rate as "[t]he annualized rate adjusted by the inflation of the supply network."   

With Algorand, for example, staking rewards are part of the Tokenomics of the coin so that they serve to insulate Algo holders from the inflationary effects of releasing more tokens. While Algorand offers 5.58%, its Adjusted Reward rate is 0%.  The staking rewards are matched to the inflation rate and will go down over time as the increase in coin supply goes down.  

While Polkadot, for example, offers a 13.13% rate to Delegators, the Adjusted Reward rate is only 4.18%. In other words, taking into account inflation, the dollar balance of an investment in DOT staked for a year would only increase by 4.18% if the value of DOT stayed the same during that time (while that's not necessarily a realistic assumption, it demonstrates the point). Kusama, on the other hand, offers 13.88% to delegators with an Adjusted Reward rate of 6.21%. As many of you may be investing in both (and hopefully using a functioning Polkaswap soon!), you might consider Kusama's ~2% advantage in Adjusted Rate.  

Now, if the underlying values go up, this will in effect be like interest or dividends. But it's important not to confuse compensation for inflation with interest income.  

It should be noted that while Cardano offers 7.3%, its Adjusted Reward rate is apparently -2.64%. That's not a typo, that really is a negative number... meaning that Cardano holders are losing 2.64% just by holding--which is starting to sound like fiat currency and making me question why I'm still holding ADA!

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Brother Numsee's Crypto Craze
Brother Numsee's Crypto Craze

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