AI Summary
Show More
Quickly grasp the article's content and gauge market sentiment in just 30 seconds!
Non-fungible tokens (NFTs) have gained significant attention since 2021, with prominent collections such as Bored Ape Yacht Club (BAYC), Azuki and DeGods. NFTs are commonly known as digital representations of art and collectibles that could potentially appreciate in value over time. However, as the NFT landscape progresses, artists, developers and collectors have been exploring new use cases for NFTs, one of which is NFT staking — the locking of NFTs in a protocol in exchange for rewards.
In this guide, we’re going to take a look at what NFT staking is, how it works, factors to consider when staking NFT, pros and cons of staking NFTs, the type of rewards holders can receive and the best platforms for NFT staking.
NFT staking refers to locking up NFTs on a platform or protocol in exchange for staking rewards and other benefits. Staking NFTs allows holders to earn passive income from their NFT holdings while maintaining ownership.
What Are NFTs?
NFTs are indivisible smart contracts, typically based on the Ethereum network, that use the ERC-721 token standard, meaning every NFT 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 the art collection industry. A significant number of 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 was one of the first milestones to accelerate the meteoric rise of NFTs.
NFTs have also found a role to play 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. Examples are Axie Infinity, Gods Unchained and Illuvium.
The uniqueness of NFTs makes them ideal for wait-and-HODL strategies, though it can take a while before such long-term investment comes to fruition. Buying and holding onto NFTs isn’t without its 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 the NFT will actually appreciate in value over time.
NFT Staking
NFT staking opens up new opportunities for collectors to monetize their NFT collections, and has become a new method for NFT holders to earn passive income. By locking their NFTs into decentralized finance (DeFi) protocols, owners can earn passive income through staking yields offered by DeFi protocols while maintaining ownership over their locked NFTs.
NFT staking is similar to the concept of DeFi yield farming, in which users holding onto cryptocurrencies can lend or stake their assets to liquidity providers to receive rewards. It’s also similar to earning interest from a bank account, but without a middleman facilitating transactions and taking a cut.
What Is Staking?
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 their networks by authenticating transactions before the data is added to new blocks on their chains. These validators 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. Hence, simply put, the security of the blockchain network increases when more holders stake their cryptocurrency.
If you're familiar with depositing money in a bank savings account, then you can easily comprehend NFT staking. While there are differences, the main principle is the same: You're able to earn interest on your funds for the duration you're invested. By staking your NFTs, you're essentially locking them into a smart contract and using them as collateral to earn rewards during the staking period.
The rewards are often based on the established annual percentage yield (APY) and number of NFTs staked. NFT staking is a simple way to make the most out of your investments, with the added benefit of giving you extra earnings.
However, it’s important to note that, like cryptocurrencies, not every NFT can be staked for rewards. Make sure to check a platform's rules before staking your NFTs, since there may be unique requirements for each one.
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 that allow users to stake NFTs offer daily or weekly rewards. 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. NFT holders can then play an active role in the community, and have a say in how the project moves forward with its development plans or certain project decisions.
On top of this, some projects will even reward holders with free NFTs from their future collections or whitelists, which entitles them to a discounted buying price.
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 later on.
How Are NFT Rewards Calculated?
Similar to cryptocurrencies that may be staked, most NFT projects offer staking benefits in terms of APY.
The reward rates for many NFT projects increase with the length of time that your NFT is locked in. As a result, NFT owners are encouraged to stake their assets for as long as feasible.
Other systems may display your predicted return in terms of tokens rather than an APY. One example would be receiving 20 of a platform’s native tokens for every day your NFT is staked.
Factors to Consider When Staking NFTs
Here are some factors for NFT holders to consider before they stake their NFTs.
As mentioned earlier on, not all NFTs can be staked. Hence, before purchasing an NFT, check whether you’ll be able to stake it for passive income. If not, you’ll want to evaluate whether the art, community or utility is enough to warrant the purchase even if it doesn’t come with passive income opportunities.
This can be checked through the project's documentation, or by asking through the originating NFT project’s official Discord channel.
Most NFT staking protocols impose lock-up periods, which can vary from days to years. During this period, when the NFT is staked, it’s likely that you won’t be able to access the NFT. Hence, you have to choose a period during which you’re comfortable with not being able to access the NFT. However, do keep in mind that the ownership of the NFT still belongs to you as its holder.
APY
Staking platforms will typically display the annual expected return for staking an NFT. Some of them may provide ridiculously high returns for staking, so be wary and do your own research (DYOR) to determine whether the platform and its offer are safe and sustainable.
For certain projects, NFTs of a higher rarity might receive higher rewards. On the other hand, some may distribute equal rewards, regardless of rarity, while others give random rewards.
Right to Participate in Project Governance
Some NFT staking platforms issue their own governance tokens to their holders. This might include governance rights to the platform’s DAO.
Cryptocurrency Price Volatility
NFTs are denominated in cryptocurrencies, which will differ based on the network they’ve launched on. Projects on Ethereum are denominated in ETH, while projects on Solana are denominated in SOL.
Hence, users have to be cautious of the volatility in a cryptocurrency’s price. If you predict that Ethereum’s price might soon fall drastically, it might be best to wait before purchasing an NFT denominated in ETH. This is because if you purchase the NFT at a high ETH price, you’ll take a loss when Ethereum’s price comes back down. Should this difference be drastic, the rewards from staking the NFT might be insufficient to recoup your losses.
NFT Price Volatility
NFT prices can fluctuate drastically. Since holders usually have to lock up their NFTs for a period when they stake, they need to be wary of any potential NFT price changes. If they’re expecting a huge price increase to occur, they may want to consider selling the NFT for a profit instead of staking it.
Conversely, by staking the NFT, the asset will be locked, and a holder might miss their opportunity to turn a profit on their NFT. This is especially true if the NFT price increase far exceeds the staking reward.
Percentage of NFTs Staked
If you’re hesitant to stake an NFT for fear of rug pulls and other exploits, you can check through the project’s website to see how much of the total NFT collection is being staked. A higher percentage of staked NFTs is a healthy sign, indicating that other NFT holders are also dedicated to holding their NFTs for a long time.
Hence, there will be a lower chance that other users will unstake or mass sell their NFTs for profit, causing the floor price to tank. A large community staking their NFTs is also representative of the reliability of a collection or NFT staking platform. Hence, users can reduce the worry of fraud.
Pros of NFT Staking
Passive Income
If you’re holding onto an NFT that qualifies for staking, and don’t have plans to sell the NFT anytime soon, staking can be a great opportunity to put your idle asset to work and earn some rewards. Once the staking period is over and you’ve collected all of your rewards, you can then choose to continue staking once more, or sell the NFT for a profit.
Engage With Projects and Communities
To inventivize users to participate in the NFT staking community, staking NFTs typically rewards holders with the NFT staking platform’s governance tokens. Token holders will be able to vote on the platform’s future direction. The weightage of your vote usually depends on the amount of governance tokens you’re holding.
Whitelists
Some projects have multiple launches, with different NFTs being distributed to the market each time. They tend to reward previous holders by whitelisting them. With a whitelist, holders can gain access to a variety of benefits, including:
Earlier minting date and time: This reduces the gas cost incurred because holders won’t have to compete with a large number of minters, which typically drives up the gas fees.
Lower mint price:Whitelists typically give a discount with regard to minting price, lowering the purchasing cost.
Cons of NFT Staking
Potential Scams/Rug Pulls
Rug pulls happen when a project’s team decides to run away with the users’ funds. Hence, if users were to stake their NFTs onto such a project’s platform, they’re at risk of losing their staked amount.
To minimize the risk of rug pulls, always do your due diligence before staking with any platform. It’s recommended you stake with reputable platforms that already have a large number of NFTs staked with them.
NFT Price Volatility
Based on how a project develops, such as scandals revolving around the founders or upcoming new launches by the team, the staked NFT could undergo a significant increase or decrease in price. If a user has opted for a longer lock-in period, they won’t be able to take profit when their NFT’s price increases. And if their NFT’s price decreases, they won’t be able to square their position and cut their losses if they want to.
Cryptocurrency Price Volatility
The values of NFTs are heavily reliant on the cryptocurrency in which they’re priced. Even if an NFT manages to maintain its value in terms of that cryptocurrency, such as buying a BAYC NFT at 60 ETH that remains priced at 60 ETH, the value of 1 ETH might have declined from $4,000 to $2,000. During periods of cryptocurrency price volatility, an NFT holder won’t be able to take profit or cut losses if their NFTs or tokens are locked up in staking.
Long Lock-in Periods
Some platforms offer long lock-in periods. Should an NFT holder need funds urgently, they’ll be unable to access their asset during that period of time. Furthermore, if the holder wants to retrieve their NFT earlier, they may risk losing all of their staking rewards.
Numerous platforms have begun to offer opportunities to stake NFTs. The process to get started is simple, as holders just need to have a compatible wallet. Below are some of the best platforms for NFT staking.
Image source: NFTX
NFTX is a platform for users who want to buy, sell, stake and swap NFTs. Users deposit their NFTs into an NFTX vault and mint an ERC-20 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 traders. A user can then earn trading fees as a liquidity provider (LP).
However, it’s important to note that by staking an NFT, a holder is giving up ownership of the specific NFT that’s been staked. This means, for example, that if the owner has staked CryptoPunk #1111 on NFTX, they may receive another NFT, such as CryptoPunk #2222, when trying to retrieve their CryptoPunk NFT. Hence, in this case, NFT staking on NFTX is more suitable for NFTs that aren’t as rare, and have common characteristics.
Holders of Bored Ape Yacht Club (BAYC), Mutant Ape Yacht Club (MAYC) or Bored Ape Kennel Club (BAKC) can stake any of these NFTs to earn APE tokens on ApeStake.io.
Exclusive staking pools will be made available to these NFT holders, with each of the pools featuring different rewards and terms. This provides flexibility so that NFT holders can choose which terms they’re more comfortable with before staking their NFTs. Note that BAKC owners would have to pair their BAKC with either BAYC or MAYC before they can start earning staking rewards. APE tokens can also be staked to earn more APE.
If the staked NFT is sold while it’s committed to a staking pool, the owner will lose their staked APE. The new owner will receive the staked APE and rewards.
Axie Infinity
Axie Infinity launched its Land Staking campaign in July 2022. There are five types of NFT land: Savannah, Forest, Arctic, Mystic and Genesis. Through staking Axie land NFTs, players can earn AXS tokens, with reward rates differing based on land rarity.
The Sandbox
Players in The Sandbox metaverse can stake their land NFTs to be rewarded with SAND tokens. The Sandbox team has set aside $10 million worth of SAND to be distributed to stakers. This is a good way for The Sandbox land stakers to earn while the project continues to develop more utility.
Image source: Splinterlands
Splinterlands is a blockchain-based collectible card game that’s similar to Hearthstone. Players can build up a collection of cards listing various abilities and stats, and use them in matches.
The game has its own native token, SPS (short for “Splintershards”), that’s set up as a DAO on 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.
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 cryptocurrency 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, especially since Ethereum has transitioned from a PoW architecture to a PoS mechanism.
Staking NFTs already has a promising foundation with prominent projects, such as BAYC, paving the way for more innovation. At this point, it seems that the biggest advantage of NFT staking is that holders don’t need to transfer ownership or sell their NFT collections. All they really need to do is lock up their NFTs in a staking pool and earn rewards.
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 are beneficial to the holders. While the concept is still nascent, constant developments in the space will likely encourage more holders to participate. If you’re keen to buy an NFT and begin NFT staking, check out our list of best NFT marketplaces to get you going.
The play-to-earn (P2E) gaming industry in particular has a lot to gain from NFT staking. To learn more about how blockchain is being used to revolutionize gaming, check out our GameFi guide.