How staking rewards compound
Staking pays you in the coin you staked. If those rewards are staked in turn, the next payout is calculated on a slightly larger balance, and the balance grows on itself.
where n = compounding periods per year
The gap between APR and APY is exactly this effect. APR is the flat rate before compounding. APY is what you end up with after rewards are reinvested. A 7% APR compounded daily works out to roughly 7.25% APY — a modest difference over one year that widens considerably over five.
Three years at 7%
100 coins staked at 7%, compounded daily, held for three years:
| Coins at the end | 123.37 |
|---|---|
| Rewards earned | 23.37 coins |
| Without compounding | 21.00 coins |
| Gained from compounding | 2.37 coins |
Compounding added about 11% on top of the rewards themselves. That is worth having, but it is not where the risk in staking lives.
What the yield does not tell you
A high APY is often compensation for a risk that does not appear anywhere in the calculation:
- Price risk. Earning 12% on a coin that falls 40% is still a losing year. The rewards are denominated in the thing that dropped.
- Lock-up and unbonding. Many networks require days or weeks to withdraw. You cannot exit during the fall that makes you want to.
- Slashing. Validators that misbehave or go offline can have part of the stake destroyed, including delegators' funds.
- Emission dilution. If new coins are minted to pay rewards faster than demand grows, the yield is partly paid out of your own share of the supply.
- Counterparty risk. Staking through a custodian trades protocol risk for company risk — a trade that has gone badly for a lot of people.
Advertised APY is rarely the APY you get
Published rates usually assume perfect validator uptime, ignore commission of 5–10%, and are quoted before any withdrawal or transaction costs. Reducing the advertised figure by roughly a fifth is a reasonable starting assumption until you have a real payout history to measure against.
Common questions
How are crypto staking rewards calculated?
Rewards accrue as a percentage of your staked balance each period. If they are restaked, the balance grows and each subsequent payout is slightly larger, which is compounding.
What is the difference between APR and APY?
APR is the flat annual rate with no reinvestment. APY includes the effect of compounding rewards back into the stake, so APY is always the higher figure for the same underlying rate.
Does compounding frequency make much difference?
Less than people expect. Moving from monthly to daily compounding at 7% adds a fraction of a percent per year. The rate itself and the length of time matter far more.
Can I lose money staking?
Yes. The coin's price can fall further than the rewards are worth, lock-up periods can trap you during a decline, and slashing can destroy part of the stake if a validator misbehaves.
Are staking rewards taxable?
Many jurisdictions treat rewards as income at the moment you receive them, then tax any later price gain separately. Rules vary widely, so check locally.