DeFi Staking
Decentralized Finance or Defi has undoubtedly created massive hype in the crypto world. It has accelerated the process of wealth creation among millions of users worldwide through interests in the staked assets. Currently, about 13 billion dollars have been invested in this ecosystem.
This unprecedented growth of DeFi serves as proof to the fact that DeFi has completely revolutionized the financial system of the world. Earlier people benefited from a meagre interest rate on their capital holdings with the banks. However, with the advent of Defi staking, people can now yield lucrative interests by just holding the cryptocurrencies without any transaction or trade being done.
While it seems unbelievable, this is how it works from a technical perspective.
The role of validators in Blockchain
The blockchain ecosystem established across the globe requires strong and powerful computing machines to perform and crosscheck the blockchain process to achieve complete decentralization. The entire process is fueled by the ‘Consensus Mechanism’. The service providers who perform such tasks of high computation and validation are awarded some rewards against their all-important services.
In this way, a fair economy is maintained without the intervention of a third party such as a bank or any other financial institute. The consensus mechanism helps maintain harmony in the ecosystem by providing an incentive to the validators which acts as a motivation for the validators to stay true in the network.
There are several consensus algorithms used in different blockchain platforms. However, the two most prominent Consensus Mechanisms are:
PoW-Proof of Work
In proof of work, a complex mathematical puzzle is used to represent the authenticity of a transaction. People who record the new transactions performed over the decentralized system onto a global ledger are referred to as Miners. Miners solve the crypto hash so as to validate and use the cryptocurrencies related to the hash. The whole process is termed Mining.
PoS-Proof of Stake
The Proof of stake mechanism provides the mining opportunities to the stakeholders (known as validators) in proportion to the assets held by them. A coin used in a transaction cannot be held in a stake simultaneously. This is how the false players who try to rig the system get their stakes confiscated from their staking wallets. This has incredibly increased the security of the blockchain even more.
It’s really commendable to see how DeFi staking has given a chance to millions of people to earn a passive income by just processing the data blocks. However, before diving deep into this technology one must understand the concept of staking. The three prominent ways how one can yield interest through staking are:
- The validation tasks assigned depend proportionally upon the crypto assets held by a user. If the user has more assets then the number of validation tasks assigned will also be high and vice versa. This way processing more blocks yields greater rewards for the user.
- Users can also generate high-interest rates annually by just holding their crypto assets on the crypto platforms online. This is one of the simplest ways to generate interest from staking.
- Additionally, the stakeholders can join with some online stake pools such as Binance or Kraken, and the rewards earned by the pool are shared among all shareholders. This is another way to generate higher interests from staking blocks.
Apart from these ways, the factors governing Defi staking rewards are:
- Staking Duration
- Assets staked by user/platform
- Inflation rate
- Network issuance rate
Staking has become the most popular medium of passive income for millions of users worldwide. The extensive use of staking on the Ethereum blockchain is the main reason behind the popularity of this financial service. The concept of ‘Lock, earn and earn more’ is followed by Ethereum 2 also. It has a more efficient security mechanism named Proof of Stake that has increased the transaction productivity exponentially.
Anyone with just 32 ETH can start staking over Ethereum, while the validators need to validate their nodes first to participate in the overall staking process. It requires stakeholders to show their assets as collateral and earn transaction integrity over the network.
Conclusion
The traditional financial system has failed to simplify the process of borrowing and lending while also being unable to provide much-needed transparency. With the advent of Defi staking, the crypto market has been able to accommodate such needs of the modern, informed customer and the market has seen tight competition for lending and borrowing from investors. The funds of any dishonest member of the blockchain are fully liable to be confiscated and rewarded among the honest parties, which acts as an added advantage.
Some platforms providing Defi staking are Coinbase, Wazirx, Crypto.com, and Poloniex among others.
According to crypto market experts, Defi is the new face of finance, and Defi staking is the catalyst for this unprecedented growth of DeFi, resulting in mass adoption and broader inclusion.
