The Ultimate Guide to Defi Staking
Since the inception of Bitcoin in 2008, the crypto ecosystem has provided viable avenues for holders to earn passive income. These passive income methods expanded further when Decentralized Finance (DeFi) became popular. Today, DeFi staking has become one of the most profitable ways to earn passive income with crypto. This article will guide you on all you should know about DeFi staking.
What is DeFi Staking?
DeFi staking is a crypto investment option that involves locking crypto assets in a smart contract for profits. It is a great way to earn passive income, as it doesn’t necessarily require advanced technical skills. With DeFi staking, crypto holders “stake” or deposit their assets in a self-generating contract, after which they work as validators for the network.
How Does DeFi Staking Work?
DeFi staking is based on the Proof of Stake system. Proof of Stake is a mechanism used to validate transactions on the blockchain network. The system uses validators who have to stake a certain amount of crypto assets before validating transactions or adding blocks to the network.
For DeFi staking, stakers are rewarded when they execute DeFi actions like validating transactions for DeFi protocols. When validators stake the required amount, they earn rewards from conducting validation on the blockchain network. These rewards are subsequently added to their initial stake. Blockchain networks that use the PoS mechanism include Solana and Cardano. Ethereum is also in the process of a transition from Proof of Work to Proof of Stake.
However, blockchain platforms often require a huge amount to be deposited to execute staking. Required deposits can be as high as 32 ETH. However, validators who cannot afford this deposit can use staking pools. These staking pools allow crypto investors to contribute staking capital. Staking rewards are subsequently distributed to pool participants depending on their contribution.
How to Start DeFi Staking
1. Pick a DeFi Staking Platform:
The first step to starting your journey in DeFi staking is picking a suitable DeFi staking platform. Some popular platforms include DeFi swap, Aqru, and YouHoldler.
2. Deposit Crypto Funds:
After picking your preferred staking platform, the next step is to stake your funds. The funds will subsequently be locked in a smart contract.
3. Start Validating:
After going through the staking processes, you can start validating transactions on the protocol. The rewards you get from the validation will be added to your existing deposit.
Other Forms of DeFi Staking
1. Yield Farming:
Yield farming involves lending money or staking cryptocurrency on DeFi platforms to earn rewards. The main difference between yield farming and other forms of staking is that yield farming involves moving crypto across different platforms to maximize earnings.
2. Liquidity Mining:
Liquidity mining involves depositing crypto assets in liquidity pools to provide liquidity to decentralized exchanges. Depositors are called liquidity providers, and they get rewards through trading fees.
While DeFi staking is beneficial if you intend to earn passive income, it comes with risks. One such risk is impermanent loss. If the value of your deposit reduces after, a withdrawal will be a loss. However, you can use impermanent loss protection to reduce your losses. You should also conduct research before starting DeFi staking.