Rewards are a feature of PoS protocols that incentivizes users’ participation in maintaining the network’s security. The rewards vary from blockchain to blockchain, with annual gains between 0-96% in native tokens (as of Sept 2021).
Each staker gets a share of newly minted coins. In an economy where the number of coins continuously increases (token dilution), those who hold tokens without staking decrease their share of the global coin supply. In such systems, not staking native coins is considered an opportunity cost. By staking, users earn rewards that protect them from token dilution and enable them to maintain or increase their relative share in the network.
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Currently, only a small percentage of token holders stake their capital or participate in blockchain governance. However, by doing so, these token holders continuously increase their share in the network and decide on protocol amendments, while the majority loses their relative stake and voting power, ultimately leading to re-centralization.
Historically, DeFi liquidity pools took capital away from PoS networks because they offered higher APY incentives. However, PoS staking had its inherent advantages. The staking rewards are considered:
- More predictable: rewards directly depend on the blockchain protocol and the number of active validators.
- Less risky: DeFi comes with many risks related to contract bugs and hacks, market manipulation, rug pulls, etc.
- Less volatile: the majority of tokens are subject to significant market value fluctuations based on changing supply and demand.
PoS can help stabilize cryptocurrency portfolios and maximize gains against fiat. It also enables users to provide network security and add to the growth of their favorite PoS projects.