Staking
Last updated
Last updated
That’s true for a majority of NFT projects, but as the market continues to grow, artists, developers and collectors are exploring new use cases for NFTs. One up-and-coming use case for NFTs is “staking” — locking up a collection in a pool and earning rewards from the staking platform.
In this guide, we’re going to take a look at what NFT staking is, how it works, what type of rewards holders can receive, and the best platforms for NFT staking.
NFT staking refers to locking up non-fungible tokens on a platform or protocol in exchange for staking rewards and other benefits. Staking NFTs allows holders to earn an income from their collection while maintaining ownership.
In the crypto world, NFTs are in vogue. They are indivisible smart contracts, typically based on the Ethereum network, that use the ERC721 token standard, meaning every token is unique. These cryptographic tokens — much like cryptocurrencies — are recorded on the blockchain and can be used to prove the ownership, authenticity, and provenance of pretty much anything physical or digital, including artwork, avatars, video files, GIFs, collectible cards, video game assets, and more.
A lot of the buzz and hype around NFTs concerns their potential to revolutionize art collecting. Many of the NFTs that have made headlines generally involve art. For example, digital artist Beeple made history in March 2021 after selling his NFT artwork “Everyday: the First 5000 Days” for a whopping $69 million at Christie’s. This event was one of the first milestones to accelerate the meteoric rise of NFTs.
NFTs have also found a home in blockchain-based play-to-earn games and GameFi projects. Play-to-earn crypto games use NFTs to give players verifiable ownership of virtual items they collect in games such as Axie Infinity, Gods — and Illuvium.
The uniqueness of NFTs makes them ideal for wait-and-HODL strategies, though it can take a while before such long-term investments come to fruition. NFTs are not without drawbacks: the process of minting, buying, and selling NFTs can be resource-intensive, sometimes requiring high transaction fees, especially on Ethereum. There’s also the uncertainty of whether or not an NFT will actually appreciate in value over time.
NFT staking opens up a new opportunity for collectors to monetize their NFT collections. It has become the new way to earn a passive income in the crypto world. HODLers who stake NFTs lock their assets in decentralized finance (Decentralized Finance (Defi) takes the decentralized concept of blockchain and applies it to the world of finance. Build...) platforms in order to receive rewards without having to sell or lose ownership of their collection. You basically get to have your cookie — and eat it, too.
It is similar in concept to Defi yield farming, an investment strategy that involves lending or staking cryptocurrencies to liquidity providers to earn rewards in the form of transaction fees or interest. It’s similar to earning interest from a bank account, but without a middleman facilitating transactions and taking a cut.
Staking involves “locking” tokens in a digital wallet to support a blockchain network’s operations and security in exchange for rewards. Platforms that support staking typically use a proof of stake (PoS) mechanism for this purpose.
Blockchains rely on a global network of transaction validators to secure the network by authenticating transactions before the data is added to a new block on the chain. These validators (also called miners) are rewarded in the native cryptocurrency of a particular blockchain for devoting their resources to the network.
For energy-intensive blockchains that use a proof of work (PoW) mechanism, such as Bitcoin, the resource validators must devote their computing power, which requires a lot of electricity and expensive specialized hardware.
PoS improves upon the PoW model’s competitive approach by requiring significantly fewer computing resources to verify transactions and secure the network. Users who want to become validators simply have to “stake,” or pledge, the native cryptocurrency of a blockchain.
The blockchain protocol locks up the funds in a staking pool and then randomly chooses validators, who are tasked with “mining” or confirming blocks of transactions. The more a participant pledges, the more likely they are to be chosen.
Every time a new block is added to the chain, new tokens are minted and distributed to the validators as staking rewards. There are the number of factors that determine how much a validator receives as a staking reward, including how many coins the validator is staking, how long the validator has been actively staking, how many coins are staked on the network, the token’s inflation rate, and more.
By staking their coins and becoming validators, coin holders are able to make their idle assets work for them in exchange for rewards and generate passive income. The cryptocurrency protocol is also secured and user transactions are confirmed. It’s a win for everybody. Users who stake their coins are still in possession of their assets and have the freedom to remove them from the staking pool at any time, depending on the terms and conditions of the cryptocurrency protocol.
NFT staking works using the same system since NFTs are essentially tokenized assets. Users can lock up their NFTs on specific platforms for safekeeping and receive rewards based on the established annual percentage yield (APY) and the number of NFTs staked.
It’s important to note that, like cryptocurrencies, not every NFT can be staked for rewards. Different projects have different requirements, so check the conditions of your chosen project first before you acquire any NFTs.
The type of reward NFT holders can get for staking their collection depends on the platform used and the type of NFT staked. The majority of platforms which allow users to stake NFTs offer daily or weekly rewards. The staking rewards are typically issued in a platform’s native utility token, which is often listed on exchanges and can be traded for other cryptocurrencies or fiat money.
Some staking platforms feature a decentralized autonomous organization (DAO), in which NFT holders can lock up their assets in the DAO As an open-sourced blockchain ledger, Decentralized Autonomous Organization (DAO) is determined by a clear set of rules ... pool to participate in the platform’s governance and vote on future proposals.
Since a majority of the NFT market is attributed to in-game NFTs, most staking opportunities are on play-to-earn gaming platforms such as Axie Infinity, The Sandbox, Polychain Monsters, Splinterlands, and others. We’ll cover some of the best platforms for NFT staking in the next section.
