Staking 100 + 1 — 100 ain’t enough.
Stake. Earn. Repeat!
Let’s talk De-fi
Remember, 2020 summers? Hot, burning, relentless, and fiery. Yes, I’m talking about De-fi. To say that it had taken Twitter and the News by the storm would be an understatement.
Look to the left, look to the right — No it’s not a Britney Spears song. Defi was to be found in every alley and every corner of the internet. Oh, in case you’re from the ice age and aren’t aware of “De-fi” yet, here’s a recap —
DeFi is everything in a bank without an actual bank. De-fi is the Gen-Z way of saying Decentralised Finance. You can basically lend, borrow, earn interest on your favourite currencies without going through the hassle and lunch breaks of the traditional banks. Want more clarity on De-fi? Click here.
But what’s so magical about the De-fi sector? One word answer. Staking.
What is Staking?
Remember the times when we believed that we were “saving” money in our little Piggybanks or almirah lockers(only for Indian mothers)? How cute. That was the hard and fast rule of traditional finance. It doesn’t have a cool name like its modern counterpart because no Gen-Z, no swag. At those times, anyone keeping their money in banks and owning a bank card was considered a higher-up of society. What banks were to the society in the 90s, De-fi is to the banks in the 21st century.
Look — Earning interest on your money by keeping it inside banks and FDs was cool in 2005, not anymore. With the rate of inflation matching number-to-number with Apple’s A12 Bionic chip benchmarks, you’re being sold a Ponzi scheme of the FIAT currency under a disguise of “attractive” interest rates.
The solution? De-fi. Earn interest on things that are free from the government and regulations. Cryptocurrency is one of the best and fastest ways to grow and accumulate wealth over a period of time by earning interests as it defies inflation, mostly. Rates like 12% on USDTs, 6% on BTCs, 7% on ETHs are very common things in the De-fi world. Best part? You earn interest in the form of crypto and not FIAT which weathers in value.
If you haven’t hopped on to a different Chrome tab for looking up De-fi, congratulations. You’re in the next level of the Squid Game.
Okay, we’ve understood that staking your coins lets you earn interest on them just like how a normal bank lets you earn interest on your FIAT currency. But what’s the utility or origin point of this seemingly magical thing?
Heard of something called the Proof of Work? If this sounds gibberish to you, here’s a cool video to check out. In short, it’s a consensus mechanism used by blockchains like Bitcoin wherein people compete against each other to solve a complex mathematical puzzle(Not 2+2=?) and the winner receives incentives in the form of? You guessed it. Bitcoin. The issue with this approach is, in order to solve a cryptographic puzzle you’d require huge computational power and energy at your disposal. To top it up, the time taken to process each transaction is a lot. Now, if your competitor is VISA, the existing and preferred payment mode, numbers like this don’t really help your cause.
Is PoW the right choice as consensus then? No, not really. *Drumroll* Enter Proof of Stake. A new consensus.
How does staking work?
In contrast to the PoW model wherein anyone can compete and validate transactions, in PoS one would require to stake(deposit to a smart contract) tokens in order to become a validator. Instead of competition among all validators to validate a single transaction, the algorithm randomly selects a validator based on their staked amounts, to validate a transaction. After completing the validation, the validator earns incentives in the form of native tokens.
So basically, it lets people earn interest for just holding certain types of cryptocurrencies. How cool is that? The more you hold, the higher are your chances of validating a transaction and the higher is the reward you receive. All this sounds lit but there’s a bummer. Most of the blockchains following a PoS consensus model, allow you to become a validator only if you possess a huge amount of tokens. For example, in Ethereum(Eth 2.0 will be PoS) you will have to own at least 32 Ether to become a validator which is about $1,38,384.64(at the point of writing).
Scary numbers, right? Still not enough to match the awesomeness of the Crypto folks. People owning a small number of tokens started delegating their tokens to people with a higher number of tokens, thus increasing the person’s chances of becoming a validator. The rewards/incentives won by the validator would be then distributed among the delegates in proportion to the amount they had delegated.
Closing thoughts.
PoS(or flavors of it) has been adopted in various blockchains like Binance, Cosmos, Polkadot, Tezos, and Solana. With so many options to stake your tokens in, the question arises — Where to delegate your tokens? Unfortunately, there’s no definite answer to this. DYOR as delegating to malicious users will result in your tokens being slashed(reduced).
We win together, we lose together. You can’t really choose one of them. So, as the famous saying goes :
