Boardroom breaks down what NFT staking is and how collectors can use it as a viable tool to earn rewards from their digital assets.
NFT staking is the latest concept buzzing in the Web3 community, but it could be a bit tricky to understand.
As Boardroom previously noted in our Web3 glossary, NFT staking is a method where holders lock up their NFT assets on a platform or protocol to earn rewards and passive income. Holders can use this practice as a viable tool to earn income from their digital assets without strictly selling them.
As the digital asset ecosystem expands, the future implications for this practice are broad — here’s a further breakdown of how NFT staking could work.
How does NFT staking work?
Remember that explainer we published on the Ethereum Merge? To refresh, the story broke down the Ethereum blockchain network’s move off of proof-of-work and transition to proof-of-stake — the latter is a consensus mechanism that requires validators to stake their crypto assets in exchange for the chance to validate new transactions on the blockchain. An initial “winner” is selected to validate a new block, and other validators can attest to its accuracy to get in on some rewards. Once a certain validation threshold is met, the network creates a new block on the blockchain, and all participating validators earn a reward in the respective network’s native crypto token.
NFT staking works similarly, as these assets can be safely parked onto eligible platforms in exchange for rewards for the holder; NFTs can also support proof-of-work blockchain networks since they are tokenized assets. Specific benefits of asset staking include earning passive income and driving scarcity on the NFTs in question, as staking them means they are off the open market and not available for resale.
Holders need a crypto wallet to stake NFTs, and they’ll need to connect their wallet to an NFT staking platform to send it there. Much like with cryptocurrency, staking platforms also operate on specific blockchain networks. Staking is attested and authenticated using a smart contract — a structured agreement that lives on the blockchain.
Important things to know
It’s important to note that not all NFTs can be staked, and not all crypto wallets are compatible with every NFT staking platform.
Think of NFT staking as depositing NFTs into a savings account at a bank; it has stay there in order to generate a return. The most important thing to know about this practice is that the NFT being staked cannot be sold or leveraged on any number of other platforms while they are parked on a staking platform.
The lock-up period for staked NFTs — a period of time by which they must remain parked on the platform before they can be detached again — vary depending on the staking platform. Some don’t lock NFTs, while some require them to be locked up for days or even years. Luckily, platforms inform holders about lock-up periods before they decide to stake.
Rewards for NFT staking vary as well. Most platforms reward participants with their native crypto tokens, and some reward via widely used cryptocurrencies or additional NFTs.