Investigating the ROI of Proof-of-Stake Mining

By Totora


Proof-of-Stake (POS) is a blockchain consensus mechanism that uses nodes (rather than mining) to record and verify block transactions. Node runners “stake” an amount of the network’s token in order to run the node. The more tokens a node stakes, the greater the probability that node will be selected to record the next block and receive block rewards.


The chief advantage of POS is that it allows for consensus without the need for Proof-of-Work (POW) mining, which requires expensive hardware and a lot of electricity. And since staking tokens is what determines which nodes are “trustworthy,” an attacker would need to control 51% of the total number tokens in circulation to reliable breach the security of a POS blockchain.


Since there’s no hardware-based mining, POS tokens are typically distributed on a fixed, predetermined schedule, which allows for a bit more stability and predictability when compared to the fluctuating hashrates of POW chains.


Performance of POS Coins


On paper, Proof-of-Stake appears to offer some advantages over Proof-of-Work, but how have POS tokens performed in the market?


To measure the performance of the POS-based coins, LongHash looked at the following three metrics:


1. Mining (i.e. staking) income: the number of tokens a staking token holder can generate based on the size of their stake. The rate of at which new tokens are created and distributed is typically predetermined on POS chains. Note that “mining” here refers to operating a staking node, not to the hardware-based mining that’s used on POW chains.


2. Price changes: the price fluctuations of each coin against other cryptocurrencies and against fiat.


3. Overall return rate: a combination of the price changes and staking income that measures the total ROI an investor who’s actively staking a particular token would see.


We took the top 24 POS tokens by market cap according to data on Messari and tracked price changes and mining income for each of these coins from April 26, 2018, to April 26, 2019 to calculate the overall return rate for each. We also looked at the overall return rate for each so far in 2019.


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(It’s worth noting that POS is an umbrella concept for a variety of more specific consensus mechanisms. The charts above include POS tokens, DPOS tokens, and mixed consensus mechanism tokens with POS.)


As can be seen in the first chart, many digital currencies including POS coins saw a huge decline during the bear market of 2018. The income generated by mining via staking, though substantial for some coins, was not enough to offset the losses created by the coins’ drop in market price, but it did soften the blow somewhat. For example, in the past year, IOST and Zcoin's mining incomes exceeded 15%, which obviously reduced losses for their token holders.


The digital currency market has been picking up in 2019, and the second chart reflects the fact that many coins’ prices have increased significantly. Income from mining via staking has been a relatively small (but certainly welcome) addition to these gains.


In the above two charts, it is also evident that tokens with larger market caps are a bit more stable during market fluctuations when compared to those of tokens with smaller market caps.


Staking income in POS projects is just one of the indicators investors should look at when evaluating whether to buy into a POS coin, and it’s important to consider other potentially influential factors. But particularly for some coins, our analysis shows that staking income can at least ease the pain caused by sharp drops in market price. After suffering through 2018’s bear market, many investors may find that idea appealing.


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