Growing your wealth while you focus on the things you enjoy, if it would be just as simple, perhaps it is.
Not long ago, crypto enthusiasts, myself included, have been introduced to the passive income model, something that before diving into crypto was considered just a fancy word that didn’t make too much sense to regular people.
With stock dividends yielding between 4-5% annually, passive income seemed to be for people that already have money. It was not too exciting to learn that you need $1 million dollars to earn $5000 a month, the kind of money that most millennials don’t have.
You know that saying…it takes money to make money…
Let’s see it for ourselves.
What does APY stand for? How is it calculated?
APY stands for Annual Percentage Yield which is the real rate of return on an investment with the compounding interest factored in.
The math formula behind the concept is: APY = (1 + r/n)n - 1.
R = project stated interest rate;
N = number of compounding periods each year.
How does APY work in Crypto? Is Crypto APY Different then Traditional APY?
APY is a term used for a long time in the traditional financial sector, now finding its usage in the crypto ecosystem. The concept works in the same way, both in traditional and crypto finance.
If you own coins that use Proof of Stake as a consensus mechanism, you can stake them and in return you will be rewarded with tokens based on the APY rate, amount you are staking and sometimes, the lock in period.
Another way to earn passive income would be to farm crypto, which is a concept of providing your assets to a liquidity pool and in exchange get paid.
It takes money to make money.
While that statement is valid, DeFi and the whole cryptocurrency ecosystem created great financial tools that seem to challenge to some degree the traditional markets.
APY of 100%, 1000% and hold on your chair 300,000%. Does it take money to make money? I’ll let you answer that.
One thing I would say, while many investors made or will make a huge return on investments speculating on high APYs, meme coins, does not mean that the concept is sustainable, so be mindful and extremely careful with this type of strategies, also this is not financial advice.
So, Why Does Staking APY Change?
Project’s APY can fluctuate from different reasons, however, it will mostly go down overall and rarely recover.
Some of reasons why staking APY change and few drawbacks of the concept:
- More people learn about the project, the less you will be making. The reward from the liquidity pool is going to be splitted between its participants; if more participants are involved, each individual will receive less, this applies to farming.
- The coin you are staking is losing value. What would be your gain if you receive 100% APY on a coin that lost 90% of its value since you locked it in? There will be no gain, answering that to avoid confusion.
The rewards from staking your coins are new coins that will get into the circulation. If 100 coins staked bring you another 100 coins within 12 months, the circulating supply is now 200. If the supply increases and there is not enough demand, the price will follow, triggering point 2.
The rewards are paid in crypto not fiat, everything is within its ecosystem, more like a house of cards.
In conclusion, staking APY changes, depending of the project and how well established it is, beside that, there are few reasons that drastic APY changes will happen, and those are listed above.