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“Goodness is the only investment that never fails.”
- Henry David Thoreau |
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In today's issue: Proof of stake cryptocurrencies reward those who are willing to lock up their coins to help keep networks secure and decentralized.
For investors, earning staking rewards is like earning interest on a money market or CD.
However, staking rewards change over time. Complicating matters further is that different blockchains pay out different reward schedules, leading to sometimes wildly different APYs on staked crypto. So, what's an investor to do if they want to maximize the yield on their staked holdings?
If you don't have time to follow all the different projects and tokens, let us do the work for you. Today, we've updated our top-rated Best Proof of Stake (PoS) Coins feature based on APY, performance, and more. To invest in the crypto assets that pay the maximum "interest," read on. |
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| | | Must Read Today's most important story for crypto investors. |
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"Liquid staking" allows a user to not only earn staking rewards on their ETH, but also to receive a "liquid staking derivative" (or LSD) to invest elsewhere.
LSDs have been growing in popularity following the unlocking of staked ETH that came with the Shapella upgrade.
We think LSD "companies" are some of the most interesting investment opportunities today. They're essentially acting like banks, but instead of holding cash, they're sitting on massive deposits of ETH.
This piece looks at valuing the ETH liquid staking industry as a whole relative to the base Ethereum network layer. This differs from a discounted cash flow method, which would have to use assumed growth and revenue numbers. Rather, this approach looks at the market penetration of liquid staking and the staking participation rate as a valuation model. |
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| Investor takeaway: If you buy the assumptions in this piece, the LSD industry is at the low end of being fairly valued, or possibly a bit undervalued. This could present opportunities granted the industry continues to grow relative to the overall Ethereum network. The spreadsheet model is available here (make a copy to tweak the numbers to your own assumptions). |
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The Best Proof of Stake (PoS) Coins by Preetam Kaushik |
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Proof of stake (PoS) is widely considered the future of crypto. It's been overtaking proof of work as a preferred consensus mechanism. PoS is generally more scalable, has lower transaction fees, and better energy efficiency.
Apart from these benefits, PoS coins allow investors to earn “interest” income — sometimes called “yield” — through a process called staking. In this article, we'll look at the basics of staking and highlight the best staking coins you may want to add to your crypto portfolio.
Looking for the best crypto staking yields right now? You can find that on our Best Staking Rates page. |
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Cardano (ADA) APY: 3.14% Market Cap: $14,246,871,837 Staking ratio: 65% 1-Year ROI: -5% BMJ Score: 3.5
Cardano was one of the original PoS tokens. At a time when Ethereum was struggling with high gas fees and scalability issues, Cardano held the title of “Ethereum killer” alongside other altcoins like Solana.
After major gains in 2021, Cardano was caught up in the bear market of 2022. While it posted some of the best returns in this group in 2023, Cardano doesn’t seem to have many exciting prospects in the short term.
Although it's an innovative blockchain with smart contracts and new features, it's struggled to beat Ethereum’s adoption or ecosystem. Now, with Shapella completing Ethereum’s transition to PoS, Cardano’s prospects of overtaking it look slim.
On the plus side, Cardano is still a vibrant project with a heavy focus on sustainability. It also has a very loyal community and a strong development team. There are over 1,000 active projects on the blockchain, and it has an all-star team of developers.
Wait and watch seems to be the best policy for Cardano investors. Based on the current state of the industry, ADA is a viable option for long-term staking.
Pros Innovative and feature-rich blockchain with constant updates Token available at a low price point Has the potential to grow Huge focus on sustainability
Cons Stiff competition from other PoS blockchains The chances of overtaking ETH look slim Not generating enough hype in the market |
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Polkadot APY: 14.24% Market Cap: $7,019,452,545 Staking ratio: 48% 1-Year ROI: -65% BMJ Score: 3.5
Polkadot is unique among PoS blockchains, with an ultimate aim to connect many different blockchains on a central platform. Unlike other major blockchains, Polkadot doesn't suffer from the highly divisive “fork” model of upgrades. Instead, the individual blockchains inside the network can upgrade on their own.
With its innovative premise, collaborations with other projects, and strong market capitalization, Polkadot could be a good PoS blockchain for staking. The native DOT token is also the staking and governance token.
In 2023, Polkadot's price held steady despite frequent market fluctuations. While the overall demand for the token remains lukewarm, the network has witnessed accelerated development activity, with new parachains and forkless updates.
With the launch of new features like Cross Consensus Message Format (XCM), Polkadot has improved its key value proposition of interoperability among parachains and other consensus-driven systems.
Focused development activity on a blockchain is generally a good sign of its prospects. And the Polkadot team has successfully sustained it despite the crypto bear markets. This is why we consider it an excellent token for long-term staking.
Pros Unique blockchain design among its PoS peers High market capitalization Potential for high staking returns
Cons The mission to unite all blockchains seems extremely ambitious. Is it realistic? |
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Solana (SOL) APY: 6.56% Market Cap: $8,843,940,427 Staking ratio: 72% 1-Year ROI: -77% BMJ Score: 3.5
Perhaps a closer rival to Avalanche and Cardano, Solana is a PoS blockchain with a heavy focus on scalability. One of the fastest blockchains in the world, this Ethereum competitor also boasts low gas fees.
The Solana ecosystem is robust and diverse, boasting DeFi projects, Web3 apps, NFTs, and more. The SOL token enjoyed a wild ride in 2021, reaching an all-time high of $260 in November.
The SOL price witnessed a sharp correction in 2022, particularly following theFTX disaster. Its close association with FTX founder Sam Bankman-Fried resulted in a near-total loss of value (over 94% by December 2022).
However, Solana's valuation has soared 125% since that time, overtaking even BTC as the wider crypto industry stages a recovery. It remains a decent option for long-term staking with excellent APY offered at all major staking platforms.
Pros A diverse ecosystem with DeFi, NFTs, and Web3 apps Very low transaction fees One of the top ten most valuable blockchain projects
Cons Frequent network outages are a major concern |
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Avalanche (AVAX) APY: 7.90% Market Cap: $5,808,731,635 Staking ratio: 63% 1-Year ROI: -74% BMJ Score: 3.0
Another contender for the title of “Ethereum killer,” Avalanche rose to prominence with the claim of being the fastest blockchain network in the world. It used a native protocol called Snow and sub-networks to achieve high transaction speeds and low latency while retaining scalability.
The AVAX token has largely remained in the top ten list of crypto assets by market capitalization since 2021. The coin is a favored option for staking due to its finite supply, which has the potential to increase prices.
Although it fell heavily in 2022, AVAX has managed to bounce back somewhat in 2023. The project has built strategic partnerships with big names like Deloitte, Amazon, Tencent, and others in both the crypto and traditional finance spaces.
Spurred by these developments, the user base in terms of daily active addresses witnessed an 85% increase in Q1 2023 ahead of big blockchains like Ethereum, bitcoin, and BNB Chain.
Avalanche remains the 7th largest blockchain in the crypto space in terms of TVL. It could still prove to be an excellent long-term investment.
Pros Has a finite supply of 720 million tokens Popular project with mainstream visibility Partnerships with AWS, Tencent, Mastercard, and Deloitte
Cons Token price fell sharply in 2022 Was linked to the Terra Luna project |
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Cosmos (ATOM) APY: 21.98% Market Cap: $3,292,753,763 Staking ratio: 70% 1-Year ROI: -45% BMJ Score: 3.0
Advertised as the "Internet of Blockchains," Cosmos was created to facilitate communication between blockchains without relying on a centralized party.
The Cosmos hub, which facilitates interoperability between independent chains, is a proof of stake blockchain powered by its native crypto ATOM. Like most coins, ATOM went on an impressive run in 2021 before a sharp correction in 2022.
While other cryptos rallied in Q1 2023, ATOM didn't. The token has been on a sustained downward trend, registering a 15% decline over three months between February and April 2023.
The lack of developer activity is a major factor behind this lackluster performance. However, with its developer friendliness, interoperability, and other ambitious plans, there's still time for Cosmos to reverse the decline.
Pros Ensures efficient connection between independent blockchains ATOM is still highly affordable Developer-friendly modular framework
Cons Cosmos has not taken off yet in terms of adoption |
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Ethereum (ETH) APY: 4.72% Market Cap: $230,858,959,524 Staking ratio: 15% 1-Year ROI: -35% BMJ Score: 3.0
In our view, Ethereum remains the blockchain project with the best long-term prospects. With its rich ecosystem of smart contracts, DeFi apps, and developers, it has the potential to dethrone bitcoin and become the world's most valuable cryptocurrency.
Ethereum’s transition from a proof of work token to a proof of stake model in 2022 attracted the attention of investors who pumped $18 billion worth of tokens into ETH2 staking after the successful merger.
More good news followed in April 2023, with the highly anticipated Shanghai-Capella (“Shapella”) upgrade. With this major network upgrade, users can finally withdraw the estimated $34 billion staked ETH for the first time since December 2020. Unlocked staking has the potential to open the floodgates, bringing in more investors and pushing ETH staking into the mainstream.
Despite taking a beating in the bear market in 2022, Ethereum has posted a cautious recovery in 2023. The crypto is trading in a positive range since the beginning of the year, and the success of the Shapella upgrade should only add further momentum.
ETH has risen 50% In Q1 2023, and trading volumes have recovered to levels not seen since 2021. Meanwhile, the requirements for solo staking are quite high (starting at a minimum of 32 ETH). Thankfully, individual investors on a lower budget can look at ETH staking pools like Lido and Rocket Pool.
Pros Future growth potential Token/blockchain with high utility Staking pools are easily available
Cons The token has an unlimited supply Solo staking is difficult and expensive |
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Internet Computer Protocol (ICP) APY: 8.52% Market Cap: $2,601,613,811 Staking ratio: 73% 1-Year ROI: -60% BMJ Score: 3.0
The Internet Computer Protocol is a blockchain designed to provide an alternative to the present market of highly centralized cloud service providers. With ICP protocols, independent data centers can come together and provide their cloud services to users.
Unlike many other blockchain projects on our list, ICP is not about tokens and digital money. It has the grandiose vision of creating a new type of decentralized internet, devoid of corporate control.
Upon its launch in 2021, ICP generated massive hype and became one of the top ten most-valued cryptos, but like the rest of the market, the token suffered a massive 98% fall in value in 2022. From its launch price of $750 in 2021, the token has fallen to just $6 in 2023.
Despite the backing of major investors like Andreessen Horowitz, ICP failed to live up to the expectations or gain traction in the crypto space. Lack of transparency, inability to attract or retain developers, and poor UX have all been cited as reasons for its spectacular fall from grace.
While the project is far from dead (it still has a $2.6 billion market cap and strong buyer interest in 2023), Internet Computer will need to make rapid inroads in its dapps space to reverse its decline. Meanwhile, the token remains an intriguing long-term staking prospect due to its project's revolutionary potential.
Pros An ambitious project with massive potential Backed by major investors like Andreessen Horowitz Fastest blockchain in the world Innovative development platform for apps
Cons Has failed to live up to the initial hype Concerns with UX, complexity, scalability, and security |
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Polygon APY: 5.83% Market Cap: $9,352,791,120 Staking ratio: 39% 1-Year ROI: -18% BMJ Score: 3.0
Originally called the Matic Network, Polygon was developed to provide scaling support for the Ethereum blockchain. When ETH struggled with high gas prices, Polygon managed to provide the same features at a lower cost and with better scaling.
The staking and governance token on the network is called MATIC. It has a finite supply of 10 billion tokens, which makes it more attractive from a long-term staking point of view. After seeing massive gains in 2021, the token devalued sharply in 2022 as part of the wider market trend.
At the same time, the network announced various upgrades and expansion plans including a green initiative to battle climate change, a global payout system, stablecoins, and NFTs.
This was followed in 2023 by the announcement of a strategic partnership between Polygon Labs and Google Cloud. The developers also unveiled the zkEVM Bridge, which is designed to improve UX and support for a wide range of ERC-20 assets.
The new features and strategic partnerships are likely to significantly improve the long-term prospects of Polygon, but in the immediate future, there's only room for cautious optimism for MATIC.
Pros Blockchain with many features and high market capitalization Has some of the highest APYs The MATIC token has a finite limit
Cons Blockchain is still in the early stages of evolution |
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Binance Coin (BNB) APY: 2.60% Market Cap: $50,793,034,836 Staking ratio: 15% 1-Year ROI: -20% BMJ Score: 2.5
Binance Coin started as an ERC-20 token issued on Ethereum before the launch of its Binance Chain blockchain (BNB Beacon Chain and Binance Smart Chain). The coin was designed to pay exchange trading fees and other expenses incurred in the Binance exchange.
BNB has since expanded from an exchange token and is now an integral part of the Binance ecosystem. Its first chain, BNB Beacon, uses a consensus mechanism known as proof of staked authority (PoSA) for validating transactions. PoSA is a combination of delegated proof of stake (DPoS) and proof of authority (PoA) consensus algorithms.
As Binance is perhaps the leading crypto company in the world, we view BNB as a proxy for investing in Binance stock. The token had a rough year in 2022 as the general bear market was compounded by news of investigations by US regulators for alleged violations of SEC rules and other financial regulations. After dropping to a low of $186 in June 2022, the token posted a significant recovery at the end of the year. In Q1 2023, BNB has been trading at around the $340 mark regularly in step with the wider recovery of the crypto markets.
The blockchain has strong fundamentals. However, it's being held back by the cloud of regulatory risk from multiple agencies in the US including the DoJ, the CFTC, and the SEC. If Binance can successfully negotiate its way out of serious sanctions, it has a bright future ahead.
Pros BNB has a unique burn policy One of the best utility tokens Low fees and fast transactions
Cons Regulatory risk in the future |
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Tron (TRX) APY: 3.79% Market Cap: $5,974,565,851 Staking ratio: 43% 1-Year ROI: 3.56% BMJ Score: 2.5
Tron is a decentralized platform for the hosting and sharing of digital content. Launched in 2017 by the Tron Foundation in Singapore, Tron was designed to eliminate middlemen and connect content creators with their audiences on a blockchain platform.
Though it was criticized for being a copy of Ethereum, Tron started gaining momentum among crypto traders due to its low transaction fees and faster network.
The blockchain has a native token (Tronix or TRX) that's used to pay content creators on the platform. TRX suffered a 50% slump in 2022, with the sharpest losses coming immediately after the collapse of FTX.
In 2023, Tron displayed weak growth, with a low 5% increase in value in Q1. Compared to its highs of 2018, TRX is down 71% in 2023. There's a long way to go for this token, but given its unique mission and active development team, it's a decent option for long-term staking.
Pros Focused on the lucrative digital content/entertainment space The delegated PoS system makes it a highly decentralized blockchain Excellent network optimization delivers fast transaction speeds
Cons Faces stiff competition in the PoS crypto space The founder is a highly controversial figure |
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What to Look for in PoS Coins
When considering an investment in PoS coins, you need to choose your investment carefully. Pay attention to at least the following five factors:
Market capitalization and trading volume: Well-established blockchain projects like Ethereum, Solana, and Avalanche are less likely to be abandoned down the line when compared to obscure projects with low market caps and trading volumes. Minimum staking requirements: Becoming a solo validator isn't easy, especially in some of the bigger blockchains like Ethereum. You may be required to stake close to $100,000 depending on the market price of the crypto asset in question. Such a setup is not for everyone. The simplicity/intricacy of the setup: Some staking setups require investors to install expensive hardware or have advanced technical knowledge of the network systems. For example, you need at least 256GB of RAM and 16 Core systems to run a Solana node. Staking Yield: Whether you're interested in running a validator node or joining a staking pool, the expected yield is often a decisive factor. Perhaps the most obvious metric involved in staking, yield determines how much you earn on your investment. ROI: Yield percentages alone don't tell the whole story. The ROI is a vital metric that tells you the projected dollar value of your staking returns. ROI is usually calculated across a specific period (i.e., one year).
The basic rule of thumb is invest in a token because you believe it's a quality asset for the long term, not because you get a short-term staking reward.
Why ROI instead of APY?
If you take a look at the table at the top of this newsletter, you will find cryptos with a wide array of annual percentage yields or APY. However, you should never pick a staking token purely based on the promise of high APY. This is due to the price volatility of the underlying token (your original investment).
If the value of that token stayed the same throughout your staking tenure, you can base your decision on APY alone. However, this rarely happens in the highly volatile world of crypto. Prices can increase or decrease drastically within a few days.
Here's an example of how it can affect your returns down the line. Consider two tokens -- A and B -- with the following characteristics:
Token A costs $10 and has an attractive APY of 30%. Token B costs $10 and has a lower APY of 5%.
You buy 100 tokens apiece of token A and B, spending $1,000 on each. At the end of the staking period (one year), you'll have 130 A tokens and 105 B tokens.
Imagine, now, a situation where both tokens change in price (which they will):
If token A grew modestly in price to $15, you now have $1,950, a profit of nearly 100%.
However, if token B took off in value and now sits at $30, you will have $3,150, thus tripling your original investment.
At the end of the day, your crypto investments are only worth the money you'll get when you sell them through an exchange. This is why you need to look at ROI, which takes the token price into consideration.
If you have the nominal APY of a PoS token, as well as its historical pricing, you can do some ROI calculations on your own. The basic formula is:
ROI = [k * (1 + RR) -1] * 100
Here, k is the price change coefficient, and 1+RR is the nominal yield coefficient.
Here is an example to help explain it further. Ethereum has a nominal yield of around 4.08% (not including compound interest). To calculate the price change coefficient k, let’s look at the price of the token 12 months apart:
ETH price on August 1, 2021 – $2,530 ETH price on July 31, 2022 – $1,695 k = 1,695/2,530 = 0.669
If the nominal yield is 4.08%, RR is 0.0408, and 1+RR is 1.0408, then using the full formula, we get: ROI = (0.669 * 1.0408 – 1) * 100 = (0.696 – 1) * 100 = -0.304 * 100 = -30.4%
Investor Takeaway
With new and existing blockchains striving to become more efficient and sustainable, proof of stake coins may be sound, long-term investments to consider. They allow you to earn interest from assets that would otherwise be dormant.
Never invest in a staking token unless you fundamentally believe in the underlying project. Staking yields change frequently, so the long-term potential of the underlying investment should be your primary concern. Staking rewards are just the icing on the cake. |
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Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It's created by John Hargrave, Nick Marinoff, Steve Walters, Anatol Antonovici, Matthew Du, Daniel Joel, and Preetam Kaushik.
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