What Is Staking?
In the crypto space, staking is the process of locking up digital currencies in a crypto wallet to maintain the activities of a proof-of-stake (PoS) blockchain and earn rewards. A PoS blockchain works by choosing validators in ratio with their holdings.
In other words, a PoS blockchain uses the staked assets as collateral to attain specific results, like confirming transactions. Like miners on a proof-of-work (PoW) blockchain, stakeholders are rewarded for finding the next block or confirming a transaction on a blockchain.
PoS blockchains are a major step in the evolution of blockchain technology. As a matter of fact, they are highly scalable and boast high transaction rates. Importantly, staking is more eco-friendly as it saves up to 99% of energy consumption compared to mining.
Summary of Important Points
- Staking is the process of locking up digital currencies in a crypto wallet to take part in maintaining the activities of a proof-of-stake (PoS) blockchain and earning rewards.
- A PoS blockchain uses the staked cryptocurrencies as collateral to confirm transactions.
- PoS blockchains are highly scalable and boast high transaction rates.
- Staking is more eco-friendly as it saves up to 99% of energy consumption.
How Can You Earn Passive Income With Staking?
You can earn as much as 23% APY (Annual Percentage Yield) for staking the BNB coin—the native currency for Binance Smart Chain. Apart from BNB, you can also stake Terra (LUNA), Polkadot (DOT), Tezos (XTZ), Polygon (MATIC), Hydra (HYDRA), Algorand (ALGO), and many more to generate interest of as high as 12% APY.
As mentioned earlier, DeFi staking is the act of holding your digital assets in a DeFi protocol to generate more tokens. It is similar to opening a fixed deposit account with a bank, depositing money, and earning a fixed deposit interest. In DeFi staking, the token you stake is often the native currency of the smart contract network—like BNB in the case of Binance Smart Chain protocol.
You become part of the network validators by locking your digital assets in a DeFi protocol. All PoS blockchains need validators to confirm transactions. In other words, validators ensure that no one cheats the system. Validators are offered newly minted coins as a reward for their services.
For instance, if you lock your DOT tokens into the Polkadot protocol, you will receive extra DOT for your role in guaranteeing network security by implementing the basic consensus principles. Once you lock your assets in the protocol, the PoS mechanism will take care of the rest onwards. All you are required to do is to claim your staking earnings periodically.
Apart from the token rewards earned, your staked assets are also eligible for a certain percentage of the revenue generated by the network. A good example is earning a share of the transaction charges on DeFi liquidity pools.
Various DeFi platforms have different pooling mechanisms. For example, you need at least 32 ETH to qualify for the Ethereum 2.0 staking. However, most Decentralized Exchanges (DEXs) that leverage the Automated Market Maker (AMM) mechanism allow users to stake their native currencies at reasonable amounts.
What DeFi Staking Platforms Are There?
There are multiple DeFi staking platforms. The most common include:
Crypto exchanges are the easiest DeFi staking platforms. You simply need to enter the amount you wish to stake, and the platform will search for a good validating node for you. Here, the exchange acts as an intermediary between you and the validating node. In this regard, when staking on an exchange, you do not have total control over your staked assets. You are simply trusting the exchange to do business on your behalf.
A staking pool comprises several investors that come together and pool their stakes as a group. For this reason, staking pools require some coordination and knowledge. This explains why most staking pools are private companies with high entry limits.
Staking-as-a-Service (SaaS) Platforms
The SaaS mechanism allows stakeholders to avoid potential problems by delegating the staking process to a service provider. Therefore, SaaS platforms conduct due diligence and make wise investment decisions on behalf of the stakeholders. Moreover, the SaaS mechanism eases the staking complexity burden. Nevertheless, the process forms a centralized system, with big companies enjoying immoderate control.
Is It a Good Idea to Get Into DeFi Staking?
DeFi staking creates more room for investors wishing to ensure network security. Importantly, it is absolutely a good method of earning passive income by holding your crypto assets. Compared to leaving your digital assets idle in a wallet, it is a good idea to get into staking.
Though staking is a good way of generating passive income, you must be aware of DeFi staking risks like impermanent loss and hacking.
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