Cryptocurrency analyst. Founder and editor at btcpeers.com
DeFi staking is one of the hottest trends in the cryptocurrency industry today. It is a simple yet powerful concept that leverages the benefits of decentralized finance. Moreover, staking is still considered one of the best ways to generate passive income from one's existing crypto holdings.
The concept of cryptocurrency staking has been around for many years now. It is a powerful way of incentivizing users to hold on to their crypto holdings. In return for doing so, these users will receive staking rewards, often close to 13% of their holdings per annum. Thus, compared to traditional savings account returns, staking rewards are a far more appealing option.
Since the inception of decentralized finance with the number of DeFi wallets on Ethereum crosses 3,000,000, the staking concept has received even more recognition. Wealth creation remains a crucial point of focus for most crypto service providers and protocols. Accelerating this wealth creation on a global scale will spark more interest in DeFi solutions. Users can achieve solid yield returns by holding their crypto. No trades or transactions are required. Finding the right platform for this activity remains essential, however.
Unfortunately, there is no widespread adoption of DeFi projects as of yet. The lack of public awareness can hold back the most innovative ideas. DeFi staking can be a viable solution for this problem, as users are introduced to new decentralized finance projects thanks to adequate staking rewards. It is a more user-friendly approach to exploring and promoting DeFi projects, which will prove beneficial to the broader industry.
The concept is virtually the same as traditional staking. Users hold a certain amount of tokens to generate passive income. As it is not as resource-intensive as mining cryptocurrency, DeFi staking is far more accessible for people who are new to cryptocurrencies. As DeFi platforms manage billions of dollars in staked assets, it is evident this industry is firing on all cylinders.
To some people, the option of DeFi staking may not make sense. However, it is a safer and less risky way of generating passive revenue compared to traditional means. Having to worry less about common issues such as corruption, lack of transparency, and hidden fees will put users at ease.
Moreover, users can tap into higher interest rates compared to savings accounts and traditional products. With fewer intermediaries, the profit potential increases exponentially. More importantly, users will always retain complete control over their funds, empowering participants in DeFi staking.
More and more platforms and protocols shift their attention to DeFi staking lately. One example is The YeFi staking DApp. This interactive DeFi tool allows users to earn passive income against their cryptos. YeFi.one project combines decentralized data storage and decentralized finance. Users are incentivized to stake tokens of decentralized data storage projects, like Filecoin, and other major assets, including BTC, USDT, ETH, BNB, YTA, YEFI with up to 80% APY rate.
Another popular platform to engage in DeFi staking is Synthetix. As a solution that lets users create synthetic assets by staking SNX, it becomes possible to trade the created assets for one another through native smart contracts or via multiple decentralized applications. The staking of SNX can also offer users trading fees from the native platform.
As numerous tokens can provide staking rewards to users, it becomes worthwhile to see what centralized exchanges offer. Binance, the leading trading platform, lets users stake various DeFi assets for a flexible duration. Supported assets include USDT, BUSD, USDC, BNB, and SXP, with an APY between 5.09% and 8.49%. Although there may be platforms offering higher PAYs out there, Binance is trusted by millions of people, giving it a competitive advantage in this regard.
For example, some people earn as high as 23% plus APY (annual percentage yield) for staking the Binance Coin. There are also those that stake Algorand (ALGO), Kava (KAVA), Texas (XTZ), Cosmos (ATOM), and even Tron (TRX) to earn up to 12% APY directly into their TrustWallet.
DeFi staking is the process of "locking" your crypto tokens into a DeFi smart contract in order to earn more of those tokens in return. It is akin to having a fixed deposit with your bank, and the bank pays you interest on your money deposited with them. Most times, the token used for staking is the native asset of the blockchain protocol, like DOT in the case of the Polkadot blockchain protocol.
By locking/staking your crypto asset in a DeFi system, you have become a part of the validators for the network. Every proof-of-stake blockchain protocol relies on these validators to ensure the security of the protocol. Therefore, the task of ensuring that no one cheats the system rests on these validators. In return, these people who have staked a part of their token to secure the network will be rewarded for their actions.
For example, if an Ethereum holder locks/stakes his token into the Ethereum 2.0 smart contract, he will earn an additional ETH for his role in ensuring the network's security by enforcing the underlying consensus rules. Because the entire process is automated, it does not demand manual oversight. Once you have deposited or staked your token into the smart contract, the proof-of-stake mechanism will handle the rest from that point onwards. All you can do after that is to periodically claim your rewards for staking.
Aside from the direct token reward for staking these tokens, the tokens also earn a percentage of the revenue accrued by the products and services offered by the platform. For example, stakers earn a share of the fees from swaps on liquidity pools.
For Ethereum 2.0, the minimum requirement for staking is 32 ETH. However, some DeFi platforms utilize a special pooling mechanism where people can stake far fewer tokens. The majority of the decentralized exchanges (DEXs) that use the Automated Market Maker (AMM) model allow users to stake their native tokens. A few examples include Uniswap (UNI token), PancakeSwap (CAKE token), Plasma.Finance (PPAY token), to mention but a few.
Models of DeFi Staking Platforms
There are different DeFi staking platforms, and they include:
Although these platforms do not offer lending and borrowing of crypto tokens, they help stakers to pool the crypto assets then distribute these assets to protocols with maximum yield. Examples include Plasma.Finance, Zapper, Zerion, etc.
Stabelcoin DeFi staking platforms
Here, users are enabled to borrow stablecoins against other crypto-assets like ETH, BTC, LTC, etc. These platforms have their own stablecoins that can be borrowed. Examples of such platforms include Compound, Aave, dYdX, etc.
Synthetic token staking platforms
These are DeFi protocols that issue synthetic assets that represent physical assets like stocks, bonds, fiat, etc. A good example is the Synthetix platform.
The concept of DeFi staking gains traction globally. As a result, more platforms and protocols provide this functionality, leading to healthy competition and innovation. Some providers opt for a varied rewards scheme, whereas others want to focus on cross-chain support. Both concepts are valid, albeit combining the best of both worlds will be a more significant gamechanger.
Compared to keeping money in a savings account, choosing DeFi staking is almost a no-brainer. It has better rewards and support for assets that cannot fluctuate in value, like stablecoins. Once cross-chain support becomes more ingrained in these solutions, there will be more compelling offerings to choose from, Putting one's money to work in a low-risk or risk-free manner is what the mainstream needs to begin paying attention to cryptocurrencies.
Although DeFi staking is a great way to earn passive income, you have to watch for the risks involved in staking. There is the risk of impermanent loss, hackers, and so on. Therefore, before you stake your token on any DeFi platform, ensure you have weighed the risks involved.
The author does not have any vested interest in the projects mentioned above.
The opinions in this article belong to the author alone. Nothing in this article constitutes investment advice. Please conduct your own thorough research before making any investment decisions.
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