Common people deposit funds in banks and earn a meager annual interest of 2-5% per year. What they do not know about is a platform that helps them yield more without giving away the ownership to a third-party like banks.
That’s how DeFi (Decentralized Finance) has revolutionized the world.
With DeFi staking, people can earn high interest by just holding their crypto assets. No complex trade (or) swapping mechanism involved.
But how? And what exactly is staking?
Can the concept of DeFi staking be developed as a business?
What is staking?
All blockchain networks need powerful computing resources to validate transactions on the blockchain and keep the system decentralized. This process of validation is executed by a consensus mechanism.
People who involve in such mechanisms validate transactions with higher-end machines and systems that consume a lot of electricity. For their invaluable service (for every validated block), they are provided rewards.
There are two types of consensus mechanism
- PoW - Proof of Work
- PoS - Proof of Stake
In Proof of Work, people who validate transactions are called miners, and the entire mechanism is called mining.
In Proof of Stake, people who validate transactions are called block producers, and the entire mechanism is called staking.
In mining, miners need hundreds of electrical systems to compute.
In staking, block producers just hold (stake) the crypto assets in their wallets.
How does staking help validators yield interest?
Staking yields interest in three ways
- The validations task is assigned to validators based on the quantity of crypto assets held. The more the assets users stake, the more the chance of validating blocks and earning rewards.
- Through Delegate Proof of Stake (DPoS), stakeholders can join stake pools, and the rewards gained by the pool are shared among the holders. Also, holders’ assets act as votes and they get to involve in governance proceedings too.
Example: Binance, Crypto.com, and Kraken.
- Other users can just hold their desired crypto assets and earn an annual percentage rate of interest yielded from the platform.
Example: If you just stake 1000 COSMOS in Trust Wallet, you earn,
+0.2503 ATOM - Daily
+6.0083 ATOM - Monthly
+72.10 ATOM - Yearly
How do more native coins are generated as rewards?
Native coins’ quantity level is increased by the network inflation process.
Some blockchain networks inflate the supply by just 1%. Some inflate by 10%. It depends.
If the inflation rate is less, the interest is also less.
If inflation is more, the interest is also high.
However, if more number of coins are produced, and the platform goes unutilized, the potential risk of a decline in value is on the cards. Hence, validators have to choose the best platform.
Staking in Ethereum 2.0
- Ethereum 2.0 follows the same concept of staking. Lock, earn and earn more.
- The minimum threshold set by Etherum 2.0 is 32 ETH. It means any user with a minimum of 32 ETH can participate in the staking process. Plus, validators require a validator node to proceed with the process.
- And just like any other staking process, validators do not need advanced current-consuming systems. All they need is a laptop with an internet connection.
- The rate of return for staking ETH is around 4% to 10%.
DeFi Staking as a business
Crypto scholars believe DeFi is the future of finance. Because such a permissionless, transparent, and secure system of financial service holds the potential of serving the world better than our conventional banks.
Hence, DeFi platforms have evolved in recent years, and their growth is astonishing.
At the time of writing, the total value locked in DeFi protocols is $12.12 Billion (USD).
Major platforms that support DeFi staking
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