During a bear market, there is usually a strong market pull-back as retail token holders, institutions, and whales alike opt for liquidity or transfer assets into safer places. They tend to stop higher risk volatility trading in favor of stability. The question becomes where to put assets in order to generate rewards while reducing risk. One safe option during crypto downturns is simply protocol staking your assets with a trusted validator.
Protocol staking is the process of locking tokens on a proof-of-stake network in order to accumulate rewards in the network’s native token. By locking up tokens for a set period of time, you help secure and govern the network. In exchange for your commitment, you earn rewards. Most networks offer rewards between 5-15% annualized.
To demonstrate the potential rewards earned from protocol staking, let’s take a look at a hypothetical example using the Cosmos (ATOM) network. For the purpose of the following exercise, compounding rewards have been calculated on a daily basis.
In our example, let’s assume you staked $1,000,000 USD worth of ATOM in December 2020, when prices were relatively low, with a rewards rate of 16.3% and a public validator fee of 7%. Between then and August 2022, you would have received $260K USD in rewards. These accumulated tokens in a bull market (assuming ATOM hits its previous 2021 ATH) could be worth up to $9.2M with protocol staking vs. $7.4M without, a ~$1.8M difference.
If you started in December 2021, of course prices were higher, but the outcome is similar. Staking $1M of ATOM would have earned you $63K of rewards by August 2022. However, in this timeframe, the value of ATOM has decreased so your total stake including rewards comes out to $323K, compared to $295K without protocol staking. This is due to the compounding nature of re-staking protocol rewards – earning additional rewards while the market fluctuates. Therefore, protocol staking is valuable in either a market upturn or downturn. In a bull market, you earn significant additional rewards. In a bear market, you protect against risk. Either way, protocol staking is the optimal rewards generating opportunity.
