What would you call a crypto project that promises to make you a millionaire in a year if you stake it?
100,000% APY (!)
A rug-pull? A scam? A ponzi scheme?
Welcome to the brave new world of high yield staking – with APYs that will have you dreaming of an early crypto-fueled retirement by Chinese Lunar New Year.
In reality though – the founders of these projects fondly refer to them as ‘social experiments’.
But how is this even possible?
Traditional crypto staking usually offers somewhere between 5-20% in returns with well established networks, and possibly double that for newer projects where you take on more risk.
So how could those numbers make any sense at all?
In this article, we’ll walk you through the exact process of how these coins work, figure out if its all a huge scam (hint: maybe, but not exactly), and whether you should consider adding them to your portfolio, even if for a short period of time.
Let’s dive in.
How Does High Yield Staking Work?
High yield staking coins are typically the native utility tokens of protocols such as:
- DAOs (decentralized autonomous organizations)
- DaaS (DeFi-as-a-Service)
- FaaS (Farming -as-a-Service)
- NaaS (Node-as-a-Service)
Or other blockchain projects. Although these projects are distinctly different from each other, the underlying principle of how they reward stakers is similar.
When you stake your coins in these protocols, you receive an equivalent amount in the project’s staked token.
These tokens are profit accruing, and through them, the staker receives a fraction of the profits made by the protocol. This is carried out through a process called rebasing.
For example, let’s take a token called $HEY, which has a supply of 200,000. Let’s say that the HEY protocol generates $3,000 per day from fees, yield farming, or other revenue-generating activities.
Now, that $3,000 can be used either to mint new tokens or be given out as dividends. That essentially means that if the coin has 30k holders at the profit distribution stage, that $3,000 is distributed among them.
The rebasing mechanism then auto-compounds your rewards towards your investment. This varies between protocols but compounded over a year, a $1,000 investment at compounded 100,000% APY should theoretically net you 1 million in tokens.
Of course, the more new investors get in on the project, the lower the APY number since the pie has to be sliced thinner and thinner, but this is how gigantic APYs are offered for first investors. More on this in a bit. First, let’s look at the types of high yield staking coins.
Types Of High Yield Staking Coins
We’ll cover the 2 main types of high yield staking coins here – variable interest and fixed interest. There are more options, but they get somewhat complicated for an introductory type of article.
Variable High Interest
Most high yield protocols fall in this category. The staking reward percentage in these protocols is calculated based on profits from the protocol or a target inflation rate.
An example of this is the Wonderland ($TIME) token. It fluctuates between 60,000% APY to 90,000% APY depending on the demand for the token.
Fixed High Interest APY
Therefore, irrespective of the number of holders, each token holder is guaranteed a certain number of coins. This typically indicates that they don’t have a set inflation rate, which causes more sell pressure on the coin as the protocol matures.
Note: While the returns are advertised as fixed, a majority vote by the community on governance protocols can change them.
Are These High Interest Staking Rewards Sustainable?
Now, let’s talk about the elephant in the room..
Are these projects even sustainable?
Fair warning: this is where things get slightly murkier.
I’m going to explain this by taking specific examples, but each project has different – sometimes extremely creative – mechanics to attempt to sustain the high yield staking rewards.
One of the key elements in most high APY projects is having a robust treasury.
Once a project has cash in hand, it can then use the money to generate revenue through a combination of yield farming, staking, and other investments.
This revenue further supports the high yield distributed to the stakers and helps the protocol maintain a high backing price.
A high backing price maintains the intrinsic value of these coins and increases the timeframe for which the project can sustain these rewards.
So, how do you build such a treasury? First, let’s take a look at an example from OlympusDAO and its token – $OHM.
Although this feature is currently disbanded, OlympusDAO and most of its forks built their treasury through a unique concept called bonding. Bonding refers to minting new $OHM tokens and selling them at a significant discount to the market rate.
The cost for the protocol to mint OHM was 1 DAI; however, the market usually traded at a much higher premium. Thus, the excess profits could be distributed to the treasury and the stakers, making the protocol sustainable as long as there was demand for the token.
On the other hand, projects like TITANO have a different take on sustaining their treasury.
They have implemented a “sell” and a “buy” tax.
Essentially, a portion of every trade goes to their treasury and the liquidity pool. Therefore, the higher the trade volume, the more money the project has.
Because DeFi is a fast-moving and constantly evolving space, this mechanisms keep evolving.
In fact, we already see some of that with Univ.money’s unique take on nodes with NFTs. Univ.money offers DeFi as a service, and instead of incurring sunk costs when you make a node with Strong, Univ’s NFTs are freely tradeable on secondary markets.
Although these mechanics might make the protocols seem sustainable, they are still theoretical and highly dependent on the market narrative.
If you’re skeptical of these high APY staking projects producing multiple millionaires after a year, you’re not wrong.
Let’s look at the inherent risks of investing in high-interest staking coins.
Risks Of Investing In High Yield Staking Coins
Apart from the obvious risk of rug pulls or smart contract hacks, the biggest risk in high yield staking is the project itself failing. After all, it doesn’t matter if you have a million tokens if they are selling at a price equivalent to zero, right?
In high yield crypto staking, for your investment to be profitable, your rebase rates should essentially outrun the depreciating value of the asset due to inflation. The demand should also be able to counter the inflation, signaling growth.
This is an easy enough task during bull markets. Driven by high yield rewards, there’s usually an influx of demand, especially at the launch of a project.
Unfortunately, the market works in cycles, and during a bear market, we can usually see the effects of inflation and low utility on most of these projects.
For instance, OlympusDAO is currently trading at $45, more than a 95% drawdown from its all-time high at $1,400. Thus, most holders would have incurred losses even with a drastic increase in their coin holdings due to the high yield returns.
It doesn’t even matter that $OHM has an intrinsic backing price that is higher than the current price of the token. In real-world terms, that translates to a company in the stock market having more cash in hand than what the market values it at.
Absurd, right? Usually, the market corrects itself.
However, in crypto, that doesn’t mean a lot unless the next DAO season starts.
Therefore, to summarize, if a protocol offers high returns, it’s important to understand that it will become less lucrative over a period of time due to inflation.
Is High Yield Staking Even Worth it?
Given the nascent stage of these projects, they are inherently on the (very) riskier side. The crazier the yield, the riskier the project.
Your success (or lack thereof) would depend on how well the project you buy into takes off, and whether you manage to get out on time.
If you get in at $50 per token, make thousands of % in APY from staking but exit at $0.01 per coin, you’ve still lost a bunch of money.
If you end up exiting when the token price, including staking profits are positive – you’ve won.
In reality, that’s much easier said than done.
That’s why if you ever do decide to ape into one of these projects – It’s always good to do that with money you are comfortable with losing if the worst comes to pass.
And If you’re just getting started in the world of crypto staking, our guide on the best crypto staking coins would be a good read.
This article is for educational purposes only. Not financial advice. High yield crypto staking is a risky investment.
Please make sure to read our Disclaimer before making any financial decisions.