Staking: What It Is and Why You Should Care

Introduction 

There are several ways to receive rewards in DeFi (decentralised finance), including staking, yield farming, and liquidity mining. Staking allows you to passively receive rewards simply by holding or locking a certain amount of eligible cryptocurrencies on DeFi platforms. 

In staking, participants add their tokens to a pool, and an algorithm picks which node will validate the block and receive rewards. Although the selection is random, users with more tokens staked have a higher chance of being chosen. 

Staking has become extremely popular in recent times. Solana, for example, has almost $50 billion of staked coins that earn an average APY (Annual Percentage Yield) of 7.02%, at the time of writing. 

How does staking work? 

Staking is inherently related to PoS (Proof of Stake) blockchain networks where users lock up a specific amount of the platform’s native tokens or coins and become validators. Validators play a crucial role in securing PoS blockchain networks and verifying transactions and blocks. 

Validators stake their assets to secure the network and are rewarded for diligently validating transactions and blocks. If they fail, they risk losing some or all of their staked assets. 

Staking pools let people combine their crypto assets to raise staking capital. Participants can deposit any amount of tokens into the pool and start earning passive rewards based on their contribution. 

Why is staking used in the crypto world? 

Staking is an essential component of PoS blockchain platforms to provide security to the network, and it’s helpful for reasons that benefit both the staking platform and the participant/ staker. 

Staking is essential in PoS governance for validating or “mining” transactions and blocks. While details vary across different chains, the core system of validators is common in most PoS processes. 

Users receive rewards for locking their crypto assets and performing staking tasks. Staking involves securing assets into smart contracts and becoming a block validator for specific DeFi protocols. 

Staking: Pros and Cons 

Pros: 

Passive rewards — DeFi staking allows community members to receive additional tokens on top of their tokens that are lent to the network. Passive rewards with DeFi staking are quite attractive and higher than reward mechanisms offered by traditional financial institutions. 

Low entry barriers — PoS staking generally has a lower entry barrier than other blockchain consensus mechanisms. For example, participants can stake their existing cryptocurrency holdings without investing in expensive mining equipment, making it more accessible to a broader range of individuals. 

Security — Since DeFi is based on Smart Contracts, DeFi staking is considered quite secure. All transactions on the blockchain need to be verified by miners, which reduces the possibility of fraud or corrupt actions on the network significantly. 

Cons: 

Price volatility — Cryptocurrencies are known for their extreme price volatility. It’s common for coin prices to fluctuate in broad ranges daily due to industry or market news. This volatility can sometimes negate the rewards received from DeFi staking. Ideally, your coins will increase in value while you’re accumulating more, but that’s not always the case. Believing in a DeFi project for the long term is important before deciding to stake your coins.