NFT staking: what it is and how it works
Key points
- Staking non-fungible tokens (NFTs) is a way for holders of digital items to earn passive income.
- The mechanism applies to specific NFTs used in a decentralised application—such as a metaverse or a game. To earn, an NFT is typically locked in a dedicated pool.
- There are dedicated platforms that allow staking of any liquid NFTs in pools.
NFT staking: what it is and how it works
Strictly speaking, staking non-fungible tokens is not staking in the usual sense, because NFT holders do not perform useful work towards blockchain consensus under a Proof-of-Stake system.
NFT staking is a financial arrangement: users receive rewards from the developers of a given decentralised application for using or locking tokens in it. In effect, NFT staking is an incentive for users and an extra carrot for digital-item owners.
NFT staking resembles yield farming in decentralised finance (DeFi), where users earn tokens for supplying liquidity or other activity.
Not every NFT can be staked—rewards typically accrue only to certain items within a specific blockchain game or other application.
In GameFi, staking-and-reward mechanics are most common—unsurprising, as many decentralised games follow a play-to-earn model.
Where NFT staking is used
Whatever the mechanism for earning by “hodling” an NFT, holders usually receive payouts in the project’s tokens. The exact terms depend on the platform, promotion, the NFT’s “rarity” and other attributes.
In spring 2022 the developers of Axie Infinity introduced a new type of digital item—virtual land as NFTs. After purchase, it can be locked for staking.
In the third “season”, which began in August 2022, the developers of The Sandbox also offered rewards to holders of NFT collections tied to the event.
The MOMOverse gaming metaverse lets users earn MOBOX tokens for staking NFTs on the platform. Rewards for staking digital items are available in popular games such as Splinterlands and Alien Worlds.
The Band Royalty NFT marketplace lets buyers acquire musician-issued NFTs and place them in “royalty pools”, receiving the BSTAGE governance token in return.
NFT staking is gradually spreading to leading crypto projects. In May 2022 the DAO of the BAYC metaverse approved integration of the mechanism. Proposal AIP-21 provides rewards in ApeCoin (APE) for those who deposit NFTs into a dedicated liquidity pool.
How to earn by staking NFTs from popular collections
An unusual approach to NFT staking is used by NFTX, a platform for minting ERC-20 tokens backed by NFTs. Any liquid collection can serve as collateral, including marquee sets such as CryptoPunks or BAYC.
A user deposits their NFT into NFTX’s shared “vault” (pool) for staking and then receives regular vToken payouts. These are funded by fees the vault collects for operations involving stored NFTs. Each pool has its own token.
If, when locking the NFT in the vault, the owner also adds Ethereum (ETH) to the pool, rewards increase severalfold.
Pros and cons of NFT staking
Putting digital items into staking is straightforward. However, rewards are often tied to in-game mechanics, so for better results it pays to understand the economy and gameplay of a given blockchain game.
The obvious advantage is added value via the prospect of passive income. Reward tokens also often have utility, such as voting on proposals in the project DAO.
On the other hand, while an NFT is staked it may rise or fall sharply in price, yet the holder cannot sell because of the lock-up. And placing an NFT worth tens or even hundreds of thousands of dollars in a third-party smart contract, rather than a personal wallet, exposes assets to additional risk.
Further reading
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