What is Staking Crypto?
Cryptocurrency staking means locking up digital assets to work as a validator in ensuring the network’s security, integrity, and continuity in a decentralized cryptocurrency network. To secure the network, stakers are rewarded with some newly minted cryptos.
Over the years, staking has been made possible with the (PoS) Proof of Stake consensus algorithm. It came out as an alternative to (PoW) Proof of Work from Bitcoin’s energy-intensive.
PoS crypto needs users to validate or stake all or a share of their holdings to secure and keep the network running. It’s unlike the PoW crypto network that needs miners to add computing power in securing the network.
Most altcoins in the early crypto years used a PoW network related to Bitcoin. However, recently most new blockchains now use PoS-based or consensus protocols.
What’s DeFi Staking?
The word DeFi means “Decentralized Finance.” Unlike Ceci (Centralized Finance), DeFi offers users decentralized services via smart contracts in a blockchain. What makes this crypto project more interesting is that the staking platforms and stakers gain from it. In other words, DeFi Staking can be beneficial to all participants.
DeFi Staking means that users can participate and utilize smart contracts in various issues through the vote of a proof-of-stake type while making passive rewards by locking their cryptocurrencies.
DeFi Stacking is different from regular staking because it happens On-chain. It means that it is entirely decentralized and the protocols aren’t directly controlled by anyone. You can stake Defi on any of these popular platforms like Solana, Ethereum, and Binance Smart Chain.
Further, Defi Staking means to offer liquidity to a trading pair on protocols like Sushiswap or Uniswap.
When you offer liquidity, other users can then take or give more liquidity to one side of the pair. They are paying a fee for doing so. Which is given to the stakers; that’s where the interest comes from. The USDC/USDT pair on Uniswap is a clear case in point.
How to Participate in DeFi Staking
Well, when it comes to participating in DeFi staking, one needs to keep in mind that even though staking is generally associated with locking up your crypto assets in a PoS blockchain in exchange for fixed staking rewards. However, we’re here discussing DeFi staking meaning participating in liquidity pools to facilitate trading on a decentralized exchange such as Uniswap, Sushiswap, 1inch, etc.
So, here’s how you can participate in DeFi staking through liquidity pools on major decentralized exchanges:
To become a liquidity provider on Uniswap, follow these steps:
- – Head to app.uniswap.org and click on Pool from the top menu
- – Now click on the “+ New Position” button and select a pair of tokens as per your choice
- – Once you select the pair of tokens, pick the fee tier as per your choice of tokens. Currently, there are three fee pairs available on Uniswap – 0.05% fee, 0.3% fee, and 1% fee.
Similar to Uniswap, here are simple steps to follow to become a liquidity partner on Sushiswap:
- – First of all, head to app.sushi.com and click on the “Liquidity” button
- – Now, select the pair of tokens and that’s it.
How are DeFi Staking Rewards Calculated?
On a general note, the staking rewards are generated according to the following parameters;
- – The number of assets staked in the platform
- – The number of assets staked by the staker
- – The total staking duration
- – The present inflation rate, and
- – The volume traded on the chosen pair
Pros and Cons of DeFi Stacking
DeFi Stacking comes with advantages and disadvantages. Some of them include;
Defi Stacking is easy to use; It doesn’t require managing several private keys, making trades, acquiring resources, or performing other complex tasks. Once you perform your first staking, it will seem very easy to do again.
It is safe and secure; Defi Stacking funds are safe and secure. Blockchains proved their resistance over the time, you can expect your assets to be in a safe place.
It accrues higher earnings; Fees needed for Defi Staking are usually low. Users can earn the highest returns while keeping the same risk level.
Availability of diverse assets; There is the presence of different assets in Defi Stacking. Users have the luxury of choosing the asset to use.
Other advantages of DeFi Staking include higher liquidity. Also, staking platforms could perform as a crypto bank while conducting borrowing and lending activities. Significantly, platform owners could earn revenue from crypto networks and stakers.
Risk of impermanent loss; Impermanent loss occurs if you offer liquidity to the liquidity pool, while the prices of your deposited asset change when compared to the deposited period. The higher the change, the more exposure to the impermanent loss. In Defi staking, the loss can mean the lower value of the dollar during withdrawal time than at the deposit time.
More technical and Less User Friendly; Defi staking, unlike others, can be more technical. Another disadvantage of Defi Staking is that it can be less user-friendly than other regular stakings.
Best Places To Do DeFi Staking
You can make some stable or passive income from crypto staking. The Best places to do DeFi Staking include one of the most well-known blockchain networks such as Binance Smart Chain (BSC), Ethereum, and Solana. They are all easy to use and user-friendly.
It’s becoming clear that staking is healthier both economically and environmentally than PoW mining. Thus, it’s properly gaining momentum with a rising market share in cryptocurrency. Significantly, the attention towards staking even gained a new wave when Ethereum made the shift finally and welcomed staking officially in mid-December 2020.
In 2021, the decentralized staking seems to hit an unprecedented height as DeFi staking flourish continues.
Despite the Defi staking FOMO-influenced growth, it should be addressed with caution, particularly the newly-designed protocols promising a suspicious big reward for liquidity providers or yield farmers.
Finally, remember that cryptocurrency staking has a major risk; thus, it is vital to do effective research while investing wisely.
Written by: Narender Charan