How to stake Algorand?

How to stake Algorand?

PIF rated Algorand token as Comfortable to invest in from a Halal perspective. You can read our full Halal report on Algorand here.

Why Stake?

Staking is a great halal way to earn income and take advantage of compounding returns.

Not only are you earning return from your investment’s growth in value, but you are also increasing your holdings for no additional cost.

If you are planning to hold onto your coins for a long period of time, staking is too good of an opportunity to pass on.

How to Stake

We are going to highlight two different methods of staking in this article, each has its own benefits and drawbacks.

The first of these is through a centralized exchange, this is a much simpler and easier way, but the returns are significantly less than the second method of staking through a native wallet.

Staking through an exchange

For this example we will be using Coinbase, there are many other exchanges that offer an Algo staking program. 

In order to maintain sharia compliance, always double-check the terms of service to make sure they are doing on-chain staking. Sometimes exchanges will mislabel lending as staking.

Staking Algorand through Coinbase is very simple, all you need to do is purchase some ALGO and hold it in the Coinbase exchange. Staking should then happen automatically 

You can avoid the high fees by using Coinbase Pro to purchase the ALGO. This will make the process a little more complicated because the Coinbase Pro interface is a lot less user-friendly. Keep in mind you have to transfer the Algorand back to your main Coinbase portfolio in order to stake it.

To do so, go to your portfolio on Coinbase Pro and hit the withdrawal button, then select ALGO, and finally choose to withdraw to Coinbase.com. There are no fees associated with doing this aside from the small fee associated with the purchase itself.

Staking with a native wallet

This method is a little more complicated than the above-mentioned. The first step is to create a wallet address for your Algorand such as My Algo myalgo.com or Algorand Wallet algorandwallet.com

Before proceeding, it is important to understand that storing funds on a crypto wallet puts you solely in charge of your own coins. Any coins that are lost or hacked will be gone forever. Do not share your private key with anyone ever and scan your computer for any malware or viruses before setting up your wallet.

We highly recommend that you use a hardware wallet to secure your keys. Make sure to have a proper understanding of the potential risks and benefits of storing your own crypto before committing to this step.

Now that you have your wallet set up, move Algo from the exchange to your wallet. Similar to before, once the Algo is in your wallet, it will stake automatically. 

Just by holding it in your wallet, you will not be maximizing profits since the traditional staking method is being phased out.

“Participation rewards will finish on approximately May 15th, 2022, to be completely replaced by increasing Governance Rewards.” – Algorand Foundation [1]

How does governance work?

Governance rewards have much higher returns than staking on its own. The Algorand protocol has become a completely self-governed system meaning that changes made to the ecosystem are voted on by the users themselves. In return, users get rewards for participating in the process.

There are four governance periods per year, each with at least one proposal [1]. To participate, you must delegate at least one ALGO to the governance period. These coins will remain in your wallet and are spendable at any time, they even collect traditional staking rewards as well. 

But there is a catch. If you go below the amount that you delegated at any moment during the period, you automatically drop out of the program. The foundation recommends that you delegate at least one ALGO less than is currently in your wallet to safeguard against any issues.

To become a governor go to governance.algorand.foundation and click connect wallet at the top right. It will bring you through a set of instructions on how to delegate your coins.

You can only enter governance during specified periods of time. For more information on the upcoming dates and more in-depth information about the program at governance.algorand.foundation

Rewards are paid out at the end of each period meaning they compound quarterly. Lastly, do not forget to vote on the proposal when voting opens up, or else you will lose your rewards. 

What are the Returns?

To estimate returns, we are going to model a dollar-cost averaging strategy over 1 year and 5 years respectively, then a lump sum over the same periods of time.

Returns will vary in dollar amount due to price fluctuations of ALGO. 

Exchange returns

At its current rate, Coinbase is giving out 4% APY compounding daily on Algorand [2]. We are unsure if Coinbase is going to change this rate in the future to better match governance rewards. For now, we are going to assume this rate will stay consistent over time.

Assuming staking rewards of 4% APY compounding daily [2]

1000 ALGO lump sum starting principle

1 year

Starting principle: 1000 ALGO

Ending balance after 1 year: 1040.81 ALGO

Rewards: 40.81 ALGO

5 years

Starting principle: 1000 ALGO

Ending balance after 5 years: 1221.39 ALGO

Rewards: 221.39 ALGO

Dollar-Cost Averaging at a rate of 100 ALGO per month

1 year

Total invested: 1200 ALGO

Ending balance after 1 year: 1226.36 ALGO

Rewards: 26.36 ALGO

5 years

Total invested: 6000 ALGO

Ending balance after 5 years: 6653.12 ALGO

Rewards: 653.12 ALGO

Wallet Returns

For this calculation, we are basing the reward amount off of the returns for governance period 2 which began on December 25th. Keep in mind that governance rewards vary depending on how many total ALGO is delegated for that period. 

This will not include staking rewards as the staking program will be ending within the period of this estimate. 

Rate: 9.47% APY compounding quarterly

1000 ALGO lump sum 

1 year

Total invested: 1000 ALGO

Ending balance after 1 year: 1098.12 ALGO

Rewards: 98.12 ALGO

5 years

Total invested: 1000 ALGO

Ending balance after 5 years: 1596.77 ALGO

Rewards: 596.77 ALGO

100 ALGO a month DCA

1 year

Total invested: 1200 ALGO

Ending balance after 1 year: 1262.91 ALGO

Rewards: 62.91 ALGO

5 years

Total invested: 6000 ALGO

Ending balance after 5 years: 7681.36 ALGO

Rewards: 1681.36 ALGO

You can also make your own calculations using staking rewards calculator: Staking Rewards  to get more personalized and advanced information on your staking rewards. 

Sources

[1] Algorand Foundation Website

[2] Coinbase Staking 

Sign up for our newsletter and receive our “Beginner’s Guide to Halal Investing in Stocks” for FREE!

Enter your email address to subscribe:*