How crypto staking benefits you, but also the token ecosystem or the blockchain
The advent of DeFi platforms has given rise to different avenues for passive income, like crypto staking and yield farming. Cryptocurrency exchanges use new strategies to leverage the huge opportunity in the decentralized finance (DeFi) market.
In this post, we shall explore the concept of staking cryptocurrency and how you can benefit from it.
What is crypto staking?
People tend to think yield farming is the same as cryptocurrency staking. Although they are both passive investment options in the DeFi market, they are quite different. DeFi yielding or yield farming focuses on locking assets for a specified period with the sole purpose of earning rewards.
Crypto staking is a more economically viable alternative to mining. It is a process where users lock their cryptocurrency assets to help improve the security, operations or value of blockchain networks or token ecosystems. Although you will receive staking rewards, the primary goal is to enhance the network’s security or to create token scarcity.
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It’s important to note that there are two forms of staking. On certain exchanges and many DeFi platforms users can stake or lock their tokens to earn interest. However, there’s also a form of crypto staking that’s far more deeper than the type seen with DeFi platform. In those cases staked tokens empower governance and nodes within an entire blockchain network.
How staking works
Every blockchain network that permits crypto staking has a minimum amount of crypto-asset that users can stake. For example, the Ethereum 2.0 network demands that a user must lock up at least 32 ETH before they can apply for a node role on the network. Once you meet the minimum balance, a node immediately deposits your crypto asset into the network as a stake.
The size of your stake is directly proportional to your chances of being selected to determine the next block on the network. If your node successfully creates a new block, you will receive a reward the same way a miner will be rewarded in a proof-of-work blockchain network. You will lose a part of your stake if you try to attack or defraud the network in any way.
However, it’s wrong to think that staking is only possible with huge amounts of tokens. Staking is a very accessible way to earn a decent APY on your staked tokens. In those cases it doesn’t matter whether you stake $10 or $1 million.
Benefits of crypto staking
Staking benefits both the cryptocurrency exchange and the staker. For crypto stakers, it is a trusted means of earning passive income.
Compared to crypto mining, staking is more energy-efficient and economically viable. Staking crypto gives you a certain level of decision power to determine how things happen within the network. Staking is also beneficial to the crypto exchange or the blockchain network on which the staking occurs. It makes it possible for a proof-of-stake blockchain network to run continuously and ensure the network’s security.
Where can you stake cryptocurrency?
You can engage in crypto staking on an exchange or certain Staking-as-a-Service (SaaS) platforms. These SaaS platforms allow you to stake your proof-of-stake (PoS) digital asset through a third party. The third-party platform handles the technical aspect of the staking process and charges you a fee for that. Examples of such SaaS platforms include Figment Networks, MyCointainer, Stake Capital, Stake.Fish, Stakinglab, etc. A much easier way to stake digital assets, can be found on an exchange like Binance, Coinbase, Kucoin, Kraken and Poloniex.
However, there are also plenty of decentralized platforms that offer staking options. Staking on decentralized platforms often is a bit more risky when compared to staking on Coinbase or Binance. Trusted DeFi platforms would be PancakeSwap, QuickSwap and Uniswap.
Risks of crypto staking
Staking crypto also comes with its risks, and it is important that you keep them in mind while diving into the staking business. Here are the major risks investors face when staking cryptocurrency, whether on an exchange or SaaS platforms:
- The volatility of the crypto market
- Low liquidity of an asset makes it difficult to sell
- Longer periods of lockup could be risky, especially when the price of your staked asset drops substantially and you cannot unstake it.
- If your validator node ‘mistakenly’ malfunctions or misbehaves, you could lose a substantial part of your stake.
The rise of DeFi has opened unending opportunities for investors and exchanges to explore. Yield farming and crypto staking are now the biggest examples. These blockchain mechanics are becoming serious alternatives to the traditional banking system where interest on your bank account is close to zero in much of the western world. However, while you dive into crypto staking, ensure you have considered the risks involved and how to mitigate them.