Explained: NFT Staking and How It Works
Whenever conversations about non-fungible tokens (NFTs) come up, people almost always think of them as digital representations of art and collectibles that could potentially appreciate in value over time.
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.
What Is 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 “Everydays: 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 comes 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 (DeFi) 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.
How NFT Staking Works
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 a number of factors which 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.
NFT Staking Rewards
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 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.
Best Platforms for NFT Staking
Numerous platforms have popped up recently which offer opportunities to stake NFTs. All you need to do is stake your NFTs in a compatible wallet to get started. Below are some of the best platforms for NFT staking.
NFTXImage source: NFTX
NFTX is a platform for creating ERC20 tokens that are backed by NFT collectibles. Users deposit their NFTs into an NFTX vault and mint an ERC20 token that’s composable and fungible at a 1:1 ratio. These tokens, called vTokens, can be staked for yield rewards or used to purchase specific NFTs from a vault.
Holders can pool their vTokens in automated market makers (AMMs) to create a liquid market for other users to trade. A user can then earn trading fees as a liquidity provider. Additionally, vTokens that have liquidity and trading volume get a “floor price” ― the lowest market price for an NFT — which is ideal for investors trying to price their NFTs.
SplinterlandsImage source: Splinterlands
The game has its own native token called SPS (short for “Splintershards”) that’s set up as a DAO on the Binance Smart Chain (BSC). Users can stake their SPS tokens on players participating in ranked battles, liquidity pools, and the DAO pool for governance voting.
BAND NFTsSteps to purchase and stake a BAND NFT. Image source: BAND Royalty
Music NFTs represent a new era for the music industry, in which creators have complete control over distribution. BAND Royalty is at the forefront of this revolution. It’s an NFT exchange where users can buy music NFTs and stake them in royalty pools to earn a portion of the proceeds their songs or albums acquire. The larger the platform’s music library becomes, the higher the royalty income stream for NFT stakers.
Polychain MonstersImage source: Polychain Monsters
Polychain Monsters is a blockchain platform for animated collectible NFTs called Polymon which are acquired from digital booster packs. Polymon have different traits and varying levels of rarity. Some combinations are extremely scarce and desirable. Polymon holders can stake their Polymon NFTs and earn weekly rewards in Polychain Monsters’ native cryptocurrency, PMON.
Doge CapitalImage source: Doge Capital
Doge Capital is a collection of 5,000 pixel art NFTs that were minted on the Solana blockchain. They can be purchased from any Solana marketplace. Doge Capital has a staking program which offers its NFT holders DAWG tokens as a daily reward. DAWG is Doge Capital’s native utility token, and it’s listed on a handful of exchanges, including Dexlab and Raydium.
Is NFT Staking a Good Investment?
The concept of NFT staking is still in its infancy. Understandably, liquidity is a big issue for NFTs — partly because the ecosystem is underdeveloped, and also because the majority of NFTs are purchased for the purpose of HODLing as long-term investments. Nevertheless, the hype around NFTs has piqued the interest of investors entering the crypto market for the first time who want to explore and potentially earn rewards on NFT platforms.
NFT staking may not yet be as popular as cryptocurrency staking, but it has a lot of potential for growth in the near future, particularly when Eth2 successfully upgrades to a PoS mechanism, with staking replacing mining.
Staking NFTs already has a promising foundation which has produced results. Perhaps the biggest advantage of NFT staking is that you don’t need to transfer ownership or sell your NFT collection. All you really need to do is lock up your assets in a staking pool and earn rewards.
It’s that simple!
The Bottom Line on NFT Staking
NFT staking is a great way to make extra passive income from your idle NFT collections. It has created new use cases for NFTs that have never been explored before. While the concept is still nascent, it will likely encourage more NFT staking opportunities. If you’re keen to start your own NFT collection, check out our list of best NFT marketplaces to get you going.
The play-to-earn gaming industry in particular also has a lot to gain from NFT staking. To learn more about how the blockchain is being used to revolutionize gaming, check out our guide on GameFi.