Crypto traders are always on the lookout to maximise their earnings through new improved methods and decentralised staking has emerged as a potential avenue for that.
Using this investment strategy crypto investors can easily generate passive income through a range of mechanisms offered by the decentralized finance (DeFi) ecosystem.
Let's explore how decentralized staking works and learn about the DeFi platforms in the crypto market.
What is Decentralized Staking?
Decentralised finance (DeFi) staking is a technique used by crypto to lock their digital assets using smart contracts. Investors have to maintain a liquidity pool while staking in order to prevent losses from price swings.
Only traders with the highest number of a specific crypto can act as validators for the transaction of that particular coin. This validator is automatically selected among all the traders across the globe. Once validators validate a transaction, they receive some commission from the traders, generating passive income.
How DeFi Staking Mechanisms Work
Proof-of-Stake (PoS) Fundamentals
DeFi staking primarily operates on the Proof-of-Stake (PoS) consensus mechanism as it validates transactions and creates new blocks.
The Ethereum network is a leader in this innovation, specially in Layer-2 solutions. Popular cryptocurrencies like Polkadot and Graph have adopted similar approaches like Ethereum. The core principle involves selecting validators based on holdings, with high-stake traders earning transaction validation privileges.
Key DeFi Staking Techniques
DeFi Staking also work by the following techniques
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Swapping:Traders can directly exchange cryptocurrencies using smart contracts. This non-custodial process ensures seamless, error-free transactions without third-party intervention.
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Liquidity Mining: Investors stake coins in liquidity pools to maintain market equilibrium. By preventing excessive price volatility, traders receive rewards for supporting market stability.
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Yield Farming: Similar to traditional interest-earning accounts, yield farming allows investors to earn returns by staking cryptocurrencies, typically measured through Annual Percentage Yield (APY).
Starknet and other Decentralized staking platforms
Now that we have got a fair idea of how decentralised staking works, let's compare some of the DeFi staking platforms available in the crypto market.
Starknet
The first major Ethereum Layer-2 blockchain which has introduced a DeFi staking feature is Starknet. It allows crypto users to earn rewards by validating transactions.
Starknet aims to further decentralise the network and has been meticulously planning to launch this DeFi staking feature for months. Ultimately, the development firm behind Starknetz StarkWare proposed it to the community in July. this year.
The DeFi staking system lets crypto users with 20,000 STRK tokens, valued at $12,000 to earn rewards by staking it for transaction validation.
Crypto traders with lesser tokens can delegate their claims to validators who will stake and earn on their behalf. Malicious validators are always at risk of losing their staking tokens.
The Starknet decentralised staking platforms give delegators and validators a 21-day period to withdraw staked tokens and the rewards related to it.
DeFi Swap
The automated decentralized exchanges (DEX) on the Ethereum blockchain, DeFi Swap, lets traders securely stake Ether and ERC-20 tokens in a trustless manner, without relying on a third party.
It is powered by the open source protocol Uniswap which is usually used for exchanging Ethereum-based assets.
Crypto users trade anonymously on DefibSwap without providing any information and it offers high liquidity for decentralized stablecoin—UniswapUSD (UUSD).
Of all the features available on DeFi Swap, its token, DeFi coins are used for crypto staking along with Either and ERC-20 tokens. The platform plans to add more stake assets as time progresses.
This decentralized staking platform also uses a range of trading pairs, giving crypto users the opportunity to trade across different digital assets. At 0.3% it also has one of the lowest DEX fees.
Cake DeFi
Cake Defi is a staking decentralized finance (DeFi) platform that lets crypto users trade on Ethereum, Bitcoin and other digital assets to earn rewards. This Singapore-based decentralised staking platform was founded in 2020, and since then it has been providing trading options in ERC-20 tokens, Litecoin, Ethereum and Bitcoin.
The staking service allows users to securely stake and store their digital assets to earn passive income from it. Cake DeFi offers 10% annual percentage yield (APY) with a fee range of 0.1% – 0.2%. It has 200 different coins and token options available for traders.
StakeWise
This 2021 established open-source DeFi platform lets crypto users stake without any deposit. Traders can stake over the Ethereum network and earn rewards
Crypto users earn sETH2 tokens when they stand on the StakeWise decentralized staking platform. These tokens can be further used on other decentralized apps over the Ethereum blockchain.
In its recent V3 update, StakeWise has introduced Vaults which will allow stakers to set staking parameters as per their will. This includes fees and node operators.
This DeFi staking platform also supports liquid staking using osETH tokens. This has enabled flexibility across the platform and also improved participation in DeFi while traders are still earning rewards
Challenges and advantages of DeFi staking
The challenges associated with decentralized staking include:
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The problem of slashing arises when validators are unable to validate transactions which usually occur when they have doubled signs on the network. Under such circumstances, validators lose their rewards or tokens.
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Sometimes the blockchain's technical requirements become quite complex which makes it crucial for traders to be cautious in setting up wallets as they can lose the entire investment.
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Attacks and scams are widespread in DeFi staking as there is no third-party oversight. This makes it crucial for traders to run a background check before interacting with other traders.
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The value of a coin can fluctuate immensely. Thus, traders must consider how much money to invest in which coin. Otherwise, there lies a big chance of losing their money either partly or entirely.
Despite these hurdles, decentralised staking offers substantial advantages like:
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DeFi staking gives traders the opportunity to generate passive income by becoming a staker or validator.
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The DeFi technique involves smart contracts to protect traders from scams and risks. Automated Market Makers (AMM) generally automate these contracts; hence the chance of errors is much less.
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DeFi staking is a relatively simple process which doesn't involve any third party and hence traders directly interact with each other.
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A trader needs to pay a very nominal admission fee to start staking.
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Lastly, stakers make huge gains as they get a large sum of rewards because of additional money earned from interests in DeFi staking.
Closing thoughts
Decentralised staking will continue to offer incredible earning opportunities for crypto investors as new platforms are launched and technologies improve. This has made DeFi staking, a promising avenue of cryptocurrency management.