What is DeFi staking?
Ethereum's transition to Proof of Stake (PoS) has significantly elevated the significance of DeFi staking. Staking plays a pivotal role in the PoS consensus system, with validators committing a minimum of 32 ETH (only for Ethereum blockchain) to engage in block proposal, validation, and safeguard the entire blockchain. In this blog post, we will delve deeply into DeFi staking, exploring its different forms, methods to accrue rewards through DeFi staking, and more. So, without any delay, let's dive right in!
How does DeFi staking work?
The fundamental purpose of DeFi staking is twofold: to enhance the security and functionality of blockchain protocols and to generate passive income for participants.
We’ll take Stader Ethereum, a flagship staking protocol with $100M+ TVL to show you how DeFi staking works. Below is a short demo:
1. Visit the Stader Ethereum platform at https://www.staderlabs.com/eth/stake/.
2. Choose a wallet from a diverse selection of over 10 options and connect it to the platform.
3. Specify the desired amount of Ethereum (ETH) to stake.
4. Confirm the staking process by pressing the "Stake ETH" button.
When you wish to retrieve their locked assets, you can initiate the unstaking process and withdraw the funds. After a waiting period of 7-10 days, you’ll get the amount directly into your wallet.
Types of DeFi staking
There are multiple ways available for DeFi staking. Some allow to secure the blockchain via locked-up assets, some allow to take part in governance, and others give opportunities to earn passive income. Below are the 5 most common types of DeFi staking.
1. Proof of Stake (PoS) Staking
The most popular form of staking is PoS staking on the Layer 1 blockchain, including Ethereum. It involves locking up cryptocurrency to validate transactions and secure the network, earning rewards in return.
2. Yield Farming
Yield farming is significant for providing liquidity to decentralized exchanges (DEXs) and earning interest or governance tokens. It's a popular way for users to put their assets to work in the DeFi ecosystem.
3. Liquidity Provision Staking
Liquidity provision is essential for decentralized exchanges like Uniswap and SushiSwap. Users stake token pairs, ensuring liquidity for traders, and receive a share of trading fees in return.
4. Governance Staking
Governance staking lets users participate in governance making, proposals, developments, policy & other important decisions of the protocol. To become eligible you have to stake your tokens with the platform & get equivalent points/tokens which will allow you to participate in governance voting.
5. Liquid Staking
Liquid staking is similar to PoS staking. Here too you’ve to lock up your tokens to secure the network & get rewards in return. But in addition to this, you get a liquid token of equivalent stake amount which you can reuse in other defi protocols for generating more rewards.
Saying this, there are other forms of DeFi staking available in the crypto market. But, we have chosen the above 5 based on security as well potential to generate rewards.
How to earn rewards in DeFi staking?
To earn rewards via DeFi staking, you have to lock up your crypto on a platform that supports staking to perform operations & secure on a particular network. Here’s a pathway you can follow to get rewards with DeFi staking.
1. Choose a Suitable Network
Before you proceed, you have to choose a suitable blockchain network, particularly PoS chains like Ethereum, Polygon, or BNB that provides rewards on DeFi staking.
2. Select a Reliable Staking Platform
Pick a reputable defi staking platform that focuses on transparency, security & provides high APR. e.g. Stader Ethereum - 120M+ TVL with 200+ node operators, triple-audited smart contracts with a $1M Immunefi bug bounty & 24/7 customer support.
3. Stake Your Assets
Once you found your ideal defi staking platform, go ahead and stake your assets with the application. Make sure to thoroughly read T&C and other nitty-gritty details to avoid any hassles later on.
4. Manage and Monitor
In DeFi staking, owing to the fast nature of the market, it’s very important to keep up with the latest trends & monitor your staked defi assets almost regularly to avoid any potential loss. You can stay updated by following crypto news on Twitter & set notifications in case of drastic market movements.
5. Unstake and Withdraw
When you've got your desired DeFi staking rewards, initiate the unstaking process. After that, your request will go to the withdrawal queue. Based on availability you can withdraw your funds between 7-10 days.
By adhering to these concise steps, you can navigate the DeFi staking process more efficiently, aiming to maximize your rewards while being aware of the associated risks and conditions.
Pros of DeFi staking
DeFi staking offers numerous benefits to crypto holders who are looking to grow their assets. Here is a list of 5 pros of DeFi staking.
1. Passive Income
DeFi staking allows users to earn passive income by locking up funds in staking protocols. You can earn additional rewards just by delegating your assets to secure the protocols or participate in governance without actively participating in trading.
2. Higher returns
DeFi staking allows you to earn higher returns in comparison to many other traditional assets. On top of your crypto gains, you can generate additional staking rewards. Returns can vary by 8-10% basis on protocols & market conditions.
3. Self-custodial
DeFi staking keeps your funds locked in non-custodial wallets, unlike centralized exchanges who know your private keys & hold assets on your behalf. Here you are the complete owner of your funds.
4. Participation in Governance
Some defi staking protocols give you the ability to participate in their governance. If you stake with their platform you’ll have a say in various decision-making of the application.
5. Diversification
DeFi staking enables you to diversify your asset class. By locking in some of your assets in crypto, you’re reducing your portfolio risk with a chance to earn higher returns.
Cons of DeFi staking
DeFi staking comes with lots of benefits but it has its fair share of risks & cons. Here’s a list of cons associated with DeFi staking.
1. Smart-contract risks
The funds that you put in DeFi staking get locked up in smart contracts which might have some bugs & vulnerabilities. In some cases, you may lose your funds during attacks.
2. Market volatility
The crypto market is highly volatile. Stakers might lose more than they have staked if the market turned downwards.
3. Regulatory hurdle
Most countries don’t have a clear framework for crypto gains. Individuals need to study the tax laws to avoid any issues with the law of that country regarding the defi staking rewards they generate.
4. Lack of insurance
Unlike TradFi, DeFi staking has no insurance. In the case of smart contract hacks or a market downturn, stakers can lose their entire fund.
5. Liquidity Lock-in
Many DeFi staking protocols have a long lock-in period. Individuals need to research & evaluate a platform before delegating their assets in these defi staking applications.
Conclusion
In summary, DeFi staking has emerged as a promising avenue for cryptocurrency enthusiasts to secure their favorite networks and earn passive income. It offers various forms of participation, from traditional PoS staking to liquidity provision and governance involvement. While it presents substantial benefits, including higher returns and self-custody, it also carries risks like smart contract vulnerabilities and regulatory uncertainties. As the cryptocurrency space evolves, individuals should approach DeFi staking with due diligence, carefully selecting reliable platforms and staying informed about market conditions. Despite the challenges, DeFi staking continues to play a vital role in reshaping the financial landscape and empowering users in the world of decentralized finance.
FAQs
1] What is DeFi Staking?
The process of locking cryptos on PoS networks for securing the protocol & add additional rewards.
2] What are the advantages of DeFi Staking?
Stakers get additional rewards on their locked-up cryptos. Node operators get rewards as well as the right to run & secure the network.
3] After I participate in DeFi Staking, how is the earnings cycle calculated?
The earning cycle calculation differs across protocols. For Stader Ethereum, a 30-day Moving Average is taken.
4] How long do I need to lock up my funds to participate in Defi Staking?
With staking protocols like Stader, there is no minimum lockup period. You can withdraw your funds immediately after locking up.
5] How long does it take to redeem?
Once you decide to unstake, your funds typically go to a withdrawal queue. Based on the entry-exit queue, you can redeem your funds within 7-10 days.
6] What are the fees associated with DeFi staking?
Platforms like Stader charge a 10% flat fee for DeFi staking.
7] How do I calculate my staking rewards?
Staking rewards come from two Ethereum layers: EL & CL. The current reward rate is 4%+ which varies from time to time.
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