Grayscale: A Guide to Staking Rewards – How to Generate Income from Crypto Assets

Staking rewards can serve as a non-correlated income source, thereby enhancing the total return on investment in Proof-of-Stake (PoS) blockchain tokens. Traditional investment income sources, such as bond coupon payments, are closely tied to central bank policies and economic conditions. Although in traditional markets, there are methods to diversify through alternative income-generating strategies, most options exhibit similar correlations to the economic cycle. Staking rewards—income earned by helping validate blockchain transactions—represent a unique potential income source, unrelated to Federal Reserve actions or overall economic performance. Staking enables token holders to participate in network consensus and security, and receive protocol-native rewards (i.e., income denominated in ETH or SOL, not fiat currency). The incentives driving staking behaviour are structurally distinct from traditional yield instruments, offering a blockchain-native income mechanism in digital asset portfolios (for more background on staking, refer to “From Miners to Stakers: How Staking Secures the Ethereum Blockchain”). Uncorrelated Returns Staking yields are controlled by protocol-specific parameters and network-layer participation rates, rather than conditions in the US dollar money market. Consequently, yields differ from traditional fixed-income yields in both level and variation over time. For example, among the top 20 Proof-of-Stake (PoS) digital assets, the median staking yield has consistently exceeded traditional fixed-income benchmarks, such as the federal funds rate or benchmark investment-grade corporate bond yields. Since 2019, the median staking yield has fluctuated between 5% and 10% annualised (Chart 1).Staking rewards also exhibit low or even negative correlation with traditional interest rate instruments. In terms of monthly changes since 2019, the median staking reward in our sample has the following correlations with traditional benchmark rates: -0.67 relative to the federal funds rate -0.71 relative to the 10-year US Treasury yield -0.76 relative to US corporate bond yields This interest rate independence enhances the potential value of staking in multi-asset portfolios, offering both income diversification potential and reduced correlation risk compared to traditional fixed-income instruments. Higher Total Return, Equivalent Risk Staking is a mechanism that can potentially increase total return while only slightly raising portfolio risk (through various operational risks, as described below). Staking rewards are paid in native blockchain tokens, not fiat currency. These rewards can be reinvested, achieving compounded growth over time, potentially creating a dual return stream—capital appreciation and staking income—without altering the investor's underlying exposure. In PoS networks, such yields typically range from 5% to 10% annually, helping offset volatility during market downturns. To quantify this effect, we created two hypothetical PoS token return indices: (1) an index including only price returns; (2) an index including both price returns and staking rewards. Both indices are equally weighted and include the top 10 PoS tokens by market capitalisation. The indices are unmanaged, and you cannot invest directly in an index. These results are purely hypothetical and do not reflect actual investor returns. The underlying indices are also hypothetical and do not represent any actual index used to evaluate broader investments. These indices were created by the authors and constructed with the benefit of hindsight. Staking rewards are not guaranteed, may not be paid, and are not an obligation of any company or government entity. Chart 2 shows the return statistics for these two indices. Including staking rewards increased the total return from 60% to 72%, implying an annualised return of 12%. Staking rewards do not contribute to price volatility (although staking may entail other risks; see the next paragraph), so the higher return also leads to a higher Sharpe ratio. Figure 2: Staking Rewards May Increase Total ReturnCompared to token price volatility, staking rewards are generally more moderate, and price volatility should be viewed as the primary risk and potential return source for most crypto asset investments. That said, staking activities can also introduce new risks, including potential slashing (loss of staked assets due to failed transaction validation), lock-up periods (limited liquidity during staking, which may affect portfolio rebalancing and the ability to respond to market changes), and smart contract risks (underlying staking protocols or smart contracts may have vulnerabilities or be exploited, especially on less secure or experimental networks). Additionally, transaction costs and staking commissions were not included in the analysis, but these fees can accumulate over time. Conclusion This analysis indicates that staking rewards represent a unique and potentially rewarding source for digital asset portfolio structuring. Integrating them into a portfolio construction framework can enhance total return potential and provide income diversification benefits independent of traditional interest rate dynamics.