Why the staking reward falls exactly as more people stake
A fixed emission split among more stakers dilutes each individual share, so the advertised APY is a snapshot that degrades with every new participant.
Intuition test — answer before you read on
Why does a staking pool's advertised APY decline rapidly after launch?
A staking pool launched with 200% APY and $2 million staked. Within a month, $50 million was staked and the APY had fallen to eight percent. The emission rate had not changed — the same number of tokens was now divided among twenty-five times more capital. Every new staker reduced the return for every existing one.
What everyone sees
New stakers see the advertised APY and assume it is what they will earn. The rate is a real-time fraction, but the entry decision is based on the fraction at time of entry. The decline is continuous and automatic, but the dashboard updates lag behind deposits, so the staker often locks in before seeing the true rate they will receive.
What is actually happening
Xu, Feng and Nica’s modelling of staking dynamics showed that APY in fixed-emission pools follows a hyperbolic decline: yield = emission / total staked. Each additional dollar staked reduces yield for all participants. The advertised rate is mathematically correct at the moment of display but misleading as a forward-looking estimate because it does not account for the inflows the rate itself attracts. The high rate is a self-defeating signal.
Why it stays hidden
The hidden mechanism is adversarial dilution through incentive-driven inflows. The high APY attracts capital, and the capital destroys the APY. The protocol advertises the peak rate knowing it will decline, because the inflows the rate attracts serve the protocol’s goal (high TVL) even as they destroy the staker’s goal (high yield). The interests are misaligned by design.
The high rate is not what you earn — it is what attracted the crowd that will reduce it. By the time you lock in, the number that brought you is already gone.
The high rate is not what you earn — it is what attracted the crowd that will reduce it. By the time you lock in, the number that brought you is already gone.
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The high rate is not what you earn — it is what attracted the crowd that will reduce it. By the time you lock in, the number that brought you is already gone.
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Sources & further reading 2
- Xu, Feng & Nica — Decentralised Finance: A Systematic Literature Review (2023)
- Harvey, Ramachandran & Santoro — DeFi and the Future of Finance (2021)
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