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Franklin Templeton just weighed in on the ongoing debate in the crypto community about staking rewards. The debate is whether staking rewards, which inflate token supply, should be considered a cost to the network. These rewards can affect passive holders because they dilute token value.
But there isn’t a clear definition of what “cost” really means. Some argue that staking rewards hurt token value while others believe the overall network value stays the same.&nbsp;
Both sides have valid points, but Franklin Templeton offers a deeper look.
<h3 id="span-style-font-weight-400-staking-rewards-affects-token-price-span">“Staking rewards affects token price”&nbsp;</h3>
Staking rewards are incentives given to token holders who lock up their tokens on proof-of-stake (PoS) networks. By staking, they help validate transactions and secure the blockchain. Validators use these staked tokens as collateral, and if they act dishonestly, they risk losing their assets through slashing.
The rewards stakers receive come from newly minted tokens, which inflates the total token supply. For instance, Ether and Solana have gross annualized inflation rates of about 0.8% and 5%, respectively.
There are two perspectives to this. One side says that because staking rewards increase the token supply, they dilute the value of each individual token, making staking a cost to token holders.
The other side argues that the network’s value is defined by market capitalization, and because staking rewards simply transfer value from non-stakers to stakers, they don’t cost the network anything.
This means that while token price may decrease due to inflation, the overall value of the network remains stable. Franklin Templeton sees both perspectives as valid but believes they address different issues.
Franklin Templeton uses an example to illustrate this point. If a network’s value remains at $100, but the supply increases from 100 tokens to 110 tokens, each token’s value drops from $1.00 to $0.91. So it does affect the price.
<h3 id="span-style-font-weight-400-value-transfer-between-stakers-and-non-stakers-is-important-span">Value transfer between stakers and non-stakers is important</h3>
Franklin Templeton goes further by explaining how staking rewards represent a transfer of value from non-stakers to stakers. If 60% of a token’s supply is staked and staking rewards inflate the supply by 10%, the network’s value holds steady while token value declines.&nbsp;
In this scenario, stakers lose value due to dilution, but they gain it back (and then some) from the staking rewards. For non-stakers, they only experience the dilution, meaning their holdings are worth less without any compensation.
Looking at the hypothetical example, Franklin Templeton shows how this works. In period t, the network has a value of $100 and a token supply of 100. Sixty tokens are staked, and 40 tokens are held by non-stakers. In the next period, after 10 tokens are minted as staking rewards, the supply rises to 110. The total network value remains at $100, but the value per token falls from $1.00 to $0.91.
Stakers, who now hold 70 tokens (60 original tokens plus 10 in rewards), have a total value of $64. Non-stakers, still holding 40 tokens, see their holdings decrease in value from $40 to $36.
Franklin Templeton explains that these effects can be tracked through on-chain data or third-party indices like the Composite Ether Staking Rate (CESR), which measures staking yield on the Ethereum blockchain. This transfer of value from non-stakers to stakers is an important consideration for anyone investing in proof-of-stake networks.

Franklin Templeton proves that staking rewards affect blockchain networks

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