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What is staking in decentralized finance and how to start using it.
“Decentralized finance (DeFi) has emerged as a game-changer in the financial sector, revolutionizing the way we perceive money and financial systems. At the heart of this transformation is the concept of staking, which enables individuals to earn passive income and access rewards that were previously exclusive to traditional financial institutions.”
Is DeFi the goldmine of the 21st century?
DeFi represents a shift from traditional financial systems to protocols and platforms operating on the blockchain. Its key elements include smart contracts, digital assets, dapps (decentralized applications), and protocols. The aim of DeFi is to remove intermediaries and establish a financial environment where users have complete control over their assets and transactions, and the community decides on its future direction. Over the last few years, DeFi platforms have experienced significant growth in both numbers and the total value locked in them. This growth is due to the promise of open access, transparency, and the potential for high returns.
Is there staking in the traditional financial system?
Banks are centralized organizations where people can deposit money into savings or checking accounts. When you keep your money in a savings account, you can earn interest.
However, this system offers only modest income and is centralized, which means the bank’s management can track the flow and amount of funds at any time, and even limit your access to your own money.
Staking in DeFi – a flight of fancy and a path to wealth
Staking in DeFi offers a modern alternative to the traditional banking system. Instead of using banks, you can deposit your digital assets into a digital vault. While your funds are “locked” in the protocol, you earn rewards or interest.
DeFi has been around for several years, and like any ecosystem, decentralized finance is constantly changing and evolving.
In today’s environment, two types of staking can be distinguished. There’s the original form of staking as it was intended, and then there’s a modified version that still allows for passive income on existing assets while retaining the essence of staking.
First there were validators: traditional staking
Staking was traditionally used to secure the blockchain network. Network validators, who validate transactions and create new blocks, would lock a certain amount of digital assets as a guarantee of their integrity. Staking can be done directly by the validators or delegated to others.
Delegated staking involves token holders entrusting their staking power to a network node responsible for maintaining the network. This means that users lock their tokens to support the node, rather than the validators directly.
The evolution of cryptan: what else is staking in DeFi
If we take staking in a broader sense, then we are moving away from the initial noble goals of validators, and are considering ways to generate passive income in decentralized projects by blocking existing funds at interest.
Providing liquidity
Users deposit their tokens into pools on decentralized exchanges. As a reward, liquidity providers earn commissions on trades using their funds.
Farming
Users strategically interact with various DeFi protocols, contributing their assets to various pools and farms to maximize returns based on current incentives. By investing their assets in the liquidity pool, users receive so-called LP tokens in return.
These tokens reflect their share of the pool. LP tokens of certain pools can be deposited at a percentage of income on special farms.
What’s good about DeFi staking?
Diversified Income
Whether it is traditional staking or its expanded types, most often your earnings will be several times higher than the income from bank deposits and other traditional financial systems.
A feasible contribution
Direct and delegated stakers contribute to the security and efficiency of the blockchain.
Available to everyone
DeFi allows more people to participate in financial transactions, from direct staking to providing liquidity, without intermediaries. The minimum amounts to participate in staking are much lower than for bank deposits with good interest rates.
Fly in the ointment in DeFi staking
While staking in DeFi offers many benefits, it is important to approach it with a cool head. As the DeFi ecosystem evolves and expands, certain issues and concerns arise that require attention and caution.
Validators are almighty
Delegated staking carries the risk of a large number of users delegating their staking power to a small group of well-known validators. This can lead to moral and ethical conflicts. Critics argue that this approach could centralize control in the hands of a few popular validators, undermining the principle of decentralization.
Smart contracts are not made of armor
As the backbone of DeFi platforms, smart contracts may have vulnerabilities in their code. Such holes can expose stakers to potential risks of hacking and loss of funds.
Permanent non-permanent losses
This is especially true for staking with liquidity provision. Impermanent losses occur when the price ratio of tokens in the liquid pool changes from what they were at the time they were deposited. Sometimes this can result in less income than expected.
The difficult life of a farmer
Interacting with multiple protocols to increase staking revenue has many pitfalls. Errors can result in losses or missed opportunities.
Sometimes empty, sometimes thick
Cryptocurrency price volatility can affect staking rewards. A decrease in token price may reduce the overall profitability of the strategy.
Law is law
From a legal perspective, DeFi is a gray area. And although many operations familiar to crypto enthusiasts are not regulated at all, it is worth keeping your eyes open and aware of jurisdictional regulations to avoid problems with the law.
How to Earn Passive Income with Yield Farming in the DeFi World
