Decentralized Finance (DeFi) staking is becoming increasingly popular among cryptocurrency holders. It provides them a new channel to generate passive income from their unused digital assets. You reserve a determined sum of crypto with a DeFi protocol. In exchange, you help secure the network and provide the infrastructure that runs it while earning rewards. This process is similar to how you earn interest in a normal savings account. How it works in the unpredictable and volatile world of decentralized cryptocurrencies is important to understand. DeFi staking offers a range of benefits and drawbacks, and knowing the different aspects is important for those looking to get involved.
DeFi staking includes various methods, each with distinct features and potential returns. Participants need to weigh these different options all while trying to make sense of the platforms that host these services. This article explores the different types of DeFi staking. From their benefits, risks, platform support, to the steps you should take to get started, we take you through it all.
Exploring Various Types of DeFi Staking
DeFi staking broadly encompasses a wide range of activities, each customized to specific assets and risk appetite. See all the different ways you can earn rewards through staking with different staking types! Whether it’s single-asset staking or NFT staking, each one comes with its own special advantages.
Single-asset staking is the simplest approach. Allow users to stake one type of cryptocurrency token and earn rewards in that same cryptocurrency token. Liquidity pool staking involves providing liquidity to a decentralized exchange (DEX) by depositing two different tokens into a liquidity pool. In exchange, liquidity providers are rewarded with a share of the trading fees each pool collects. Yield farming is a more advanced strategy that requires regularly moving assets between different DeFi protocols to maximize returns. It usually requires staking several tokens across multiple pools and platforms.
Liquid staking allows users to stake their tokens and simultaneously receive a liquid representation of those assets. You can then take this new liquid representation and deploy it into other DeFi activities. Through governance staking, you can stake your tokens while simultaneously participating in a DeFi protocol’s governance. With your staked tokens, you can vote on proposals and help shape the project’s future. Now DAO staking closely resembles governance staking, but specifically for Decentralized Autonomous Organizations (DAOs). In this decentralized system, qualified members stake their tokens to participate directly in decision-making processes. NFT staking is the process of staking non-fungible tokens (NFTs) in order to earn rewards — often these rewards consist of earning new NFTs or crypto tokens.
Benefits of DeFi Staking
The main advantage of DeFi staking investing is the ability to earn passive income on crypto assets. Through the act of staking tokens, users can earn rewards without the constant need to trade or actively manage their digital assets. DeFi staking usually provides returns that are significantly higher than traditional savings accounts. You’re able to make a lot more money too, relative to fixed-income investments.
Beyond helping individuals earn passive income, DeFi staking plays an important role in securing and stabilizing blockchain networks. By locking up tokens, stakers help to secure the network and validate transactions, which is particularly important for Proof-of-Stake (PoS) blockchains. Staking allows users to play a more active role in the governance of DeFi protocols. Their engagement provides them with the opportunity to have a say in future development and direction of the projects they advocate for.
Liquid staking gives users more flexibility. That’s because it enables them to unlock the value of their staked assets, even if those assets are otherwise locked up. This is particularly cool for anyone looking to jump into a broad range of DeFi opportunities. You can continue to earn staking rewards even while being active in governance!
Risks and Considerations in DeFi Staking
Even with these potential upsides, DeFi staking comes with significant risks. Of all the threats, price volatility is the most menacing. The value of these staked tokens can fluctuate wildly, eroding your rewards in the process. The risks of smart contracts Smart contracts are dangerous. DeFi protocols are prone to hacks and exploits which can leave all staked funds at risk.
Lock-up periods introduce unnecessary friction for users. During these periods, tokens can be inaccessible for days or weeks, locking users out from selling or trading their assets. Understanding each lock-up period—and the penalties for early withdrawal, if one exists—is critical to staking tokens responsibly. The risk of impermanent loss relates to when you stake in liquidity pools. That’s because if the value of your deposited tokens goes down, you will actually lose money relative to simply holding those tokens in your wallet.
Regulatory uncertainty has become a prominent feature of the DeFi landscape. The legal framework surrounding these activities is still rapidly evolving, and that any future changes in regulations could make DeFi staking illegal or unviable. Don’t enter DeFi staking without doing some research first. As with any type of speculation, know the risk, and don’t invest more than you’re willing to lose.
Platforms Offering DeFi Staking
Hundreds of platforms provide DeFi staking with different supported tokens, reward structures, and risk levels. Lido is Ethereum’s dominant staking-as-a-service protocol. It powers the ability for users to stake ETH and receive stETH, which can subsequently be used in different DeFi applications. Rocket Pool’s more decentralized alternative to Lido gives a stronger, community-oriented choice for Ethereum staking.
Aave is one of the most popular decentralized lending and borrowing protocols. Users can individually stake their AAVE tokens to earn rewards and participate in governance. In comparison, Curve mainly specializes in stablecoin trading and incentivizes users to provide liquidity to its pools by staking CRV tokens. Other popular platforms include Yearn.finance, Compound, and MakerDAO, with diverse staking options and unique features.
So, when selecting your DeFi staking platform, make sure you choose well! Consider its security measures, supported tokens, reward rates, governance structure and more before choosing the right one. In a second layer of safety, it’s generally recommended to spread staking operations among different platforms to further reduce risk.
Getting Started with DeFi Staking
Users need to have a Web3 wallet to initiate DeFi staking. These wallets largely are browser-based wallets, with MetaMask and Rabby among the most popular options for interacting with decentralized applications. Hardware wallets — Ledger is the most popular example — add security by keeping your private keys offline. After you create a wallet, you’ll want to begin the process of acquiring the tokens that you plan to stake. Acquire these tokens on cryptocurrency exchanges and put them to work.
First, you’ll need to link your wallet to a staking service such as Lido or Aave. Next, pick an appropriate staking pool or staking program that best meets your requirements. Users have to approve the staking transaction in their wallet, which is usually just a confirmation step that includes paying a fee for the transaction. Once the transaction is confirmed, the tokens will be locked up in the staking contract and rewards start to accumulate.
Platforms such as Lido democratize these opportunities, enabling users to stake amounts as low as 0.01 ETH. In return, they get a liquid representation in the form of stETH, creating new possibilities for users with limited balances. Curve's governance token, CRV, is used to boost yields when staked, providing an incentive for users to participate in the platform's governance. With DeFi staking, you can get started with as little as $10! This relatively low barrier to entry, again dependent on platform and token, means that virtually anyone can become a user.
Practical Examples of DeFi Staking
Now, to further demonstrate how DeFi staking works in practice, let’s look at a few examples. On Lido, a user can stake ETH and immediately receive stETH in return, an ERC20 token representing their staked ETH balance that automatically accrues staking rewards. This stETH can then be used in other DeFi protocols, like Aave or Curve, to earn a further yield on top.
On Curve, a popular liquidity provider, users can passively supply liquidity to a stablecoin pool such as USDT/USDC. In exchange, they’re given LP tokens in appreciation of their liquidity provision. You can then stake these LP tokens to earn CRV tokens. Next, you can stake the CRV tokens again to amplify your yield from the liquidity pool. For example, on Aave a user can deposit crypto assets they own, like Ethereum (ETH) or USDT, and receive interest on the value of their deposits. Like traditional banks, they can lend out cryptocurrencies using their deposits as collateral, giving them even more ways to leverage their assets.
These three examples represent the versatility and potential of DeFi staking. Developers, investors, and users need to know the unique mechanics and risks of every platform and protocol.
Long-Term Impact of DeFi Staking
Through DeFi staking, we can build a better future of finance together. It provides users with a simpler, clearer and faster method to make money passively from their digital items. The DeFi ecosystem remains fast-growing and maturing. As decentralization continues to advance, staking will undoubtedly become a key pillar in the expansive financial ecosystem.
The growth of DeFi staking could lead to greater decentralization and democratization of finance, as it empowers individuals to participate in the financial system without relying on traditional intermediaries. Looking ahead, ultimately, for DeFi staking to be long-term successful, it needs to address a range of risks and challenges. These known challenges include price volatility, smart contract vulnerabilities, and regulatory uncertainty.
There’s a tremendous opportunity for further innovation and development in the DeFi space to come up with more secure, user-friendly, and sustainable staking solutions. This would encompass building better risk management tools, enhancing smart contract security, and creating more explicit regulatory frameworks for DeFi operations.
Regulatory Landscape of DeFi Staking
It’s hard to determine the current regulatory landscape for DeFi staking, as we are seeing it change every day. Each jurisdiction operates without clear and consistent standards. Regulatory approaches at the national level Some countries have been more proactive in regulating DeFi, while others have taken a wait-and-see approach. Without clear and consistent rules, this leaves a giant cloud of doubt hanging over everyone working in DeFi. This regulatory limbo can stifle the development and uptake of DeFi staking.
Regulators are still struggling with the definitions of what constitutes DeFi, such as in staking, and if current securities laws can be enforced. Many regulators, including the SEC, take the position that DeFi tokens are securities which would require them to adhere to securities registration and compliance obligations. Proponents of these tokens counter that DeFi tokens are closer to commodities or currencies and thus can be regulated under other frameworks.
Whether anti-money laundering (AML) and know-your-customer (KYC) regulations would apply to DeFi staking is another matter of contention. To them, AML and KYC requirements are a vital bulwark against illicit drug money flowing through our towns. Yet others argue that these requirements contradict the decentralized and permissionless ethos of DeFi. DeFi players need to be aware of the shifting regulatory environment. During the process, they must act in accordance with the laws and regulations that govern their jurisdictions.
Future Trends in DeFi Staking
Here’s a breakdown of the biggest trends that will determine how DeFi staking looks in the future. Another trend is the rise of liquid staking. This breakthrough innovation gives users the unique ability to unlock the value of their staked assets, all while still earning staking rewards. Unlike in 2020, liquid staking protocols today are moving fast. They’ve increased the choices they offer users by giving them more ways to leverage their staked assets in other DeFi activities.
Decentralized autonomous organizations (DAOs) are in vogue. Governance staking increasingly popular, governance staking allows token holders to vote on protocol decisions. One of the hottest trends these days has been around DAOs within the DeFi ecosystem. Therefore, governance staking has become essential for guiding the course of these entities.
Look for the future of DeFi staking to be robust. The development of more sophisticated risk management tools and strategies will drive this growth. How to mitigate smart contract risks with insurance protocols. On top of that, strong portfolio management tools exist to allow you to diversify your staking activity and hedge your risk exposure.
