Staking: An Easy Way to Participate in Decentralized Finance.
Brief Introduction to DeFi
To many people, 2020 might have been the first time that they heard of decentralized finance — DeFi. However, the idea of decentralized finance can be traced all the way back to 2008 with Satoshi Nakamoto’s Bitcoin White Paper. The term “DeFi”, however, was not coined until August of 2018 when a group of Ethereum developers and entrepreneurs came together to build open financial applications on their blockchain.
DeFi’s success has been driven by the shortcomings of banks and financial institutions, as well as crucial issues that have emerged because of their negligence:
1- The mistrust of the global financial and banking system.
Banks have let down small retail customers and stopped looking after their financial well-being — profit margins and motives have trumped the best interest of the consumer. But have the banks ever truly cared? According to a report from Accenture, ~60% of people do not trust their bank with their money.
2- Poor to non-existent access to alternative investments.
One of the biggest issues that DeFi looks to resolve is making finance more accessible. Traditional financial systems have high barriers to entry making it difficult for people to have access to financial tools. In the Philippines, more than 71% of the adult population are unbanked. The Philippines is only one of many countries that do not have access to finance. As of right now, there are still 1.7 billion adults around the world that remain unbanked. Many of these countries face issues with KYC, gruesome paperwork and certificates, insufficient income level, lack of government and financial infrastructure, and numerous security concerns. These issues make it difficult for retail users to have access to even the most basic financial tools. DeFi looks to solve this issue by making finance more accessible and digestible for users.
And on the other hand, these same banks have been exploring how to invest in crypto themselves and have started to push (and facilitate) their ultra-high-net-worth-individuals (UHNWI) investments in the industry.
While DeFi is still in its infancy, developers and early adopters are working hard to solve unique pain points like scaling up to directly challenge traditional or centralized finance (CeFi).
How does DeFi actually challenge financial markets?
DeFi cuts out the middlemen (banks, insurance companies, brokers, market makers, transfer agencies, etc.) by allowing the end-user to benefit from actions like lending, borrowing, and transferring without centralized agencies taking fees and profits.
The reduction in predatory middlemen and elevated transparency enables a new era of peer-to-peer autonomous networks — putting the financial freedom and power to bank oneself into the hands of those who need it most. Not to mention, traditional banking systems are vastly outdated. Many of the core banking suites built are by COBOL which was a programming language back in 1959.
It is not to say that old programming languages are bad, but the current expertise and need for such technology are not the same as before. Currently, only 30% of universities provide educational classes on COBOL, and the usage of such technology is on its decline.
Simply put, decentralized finance will help reduce or eliminate inefficiencies in the current financial system and become the new norm for financial markets. This is not to say that DeFi will replace CeFi (centralized finance), it is the rebirth of the financial system as we know it. Traders, hedge funds, and banks will be the first to interact and maximize the potential of DeFi.
DeFi is disrupting everything from trading stocks and bonds on & off exchanges, to applying for a mortgage, to lending and borrowing, to earning 0.03% APR on your savings accounts, and getting access to “complex” financial products.
DeFi applications offer access to tools to retail that the traditional financial institutions do not while providing utility to traditional entities in the form of faster contract resolution, KYC/AML, and automated systems like on-chain portfolio management.
In essence, DeFi applications offer access to instruments and financial tools that historically the layman could not access, and the traditional financial players are scrambling to integrate with.
“What is the simplest way to get into DeFi?”
“How can my money work for me?”
One of the most popular terms in 2021 was Staking. The term “cryptocurrency staking” hit a peak back in November 2021 on Google Trends indicating a growing interest in the methodology.
The idea of staking is that it is a low-to-no-energy and easy-to-access mechanism that passively allows you to make money with crypto. The mechanism known as staking does not require any equipment or special knowledge. Synchrony provides a native staking mechanism that makes it easy for users to earn on their crypto, we will discuss more on that later.
With staking, you just need to hold your coins in a wallet or protocol and then simply commit them into a smart contract to be paid by the network, which in effect earns passive income.
The key takeaways?
Staking is the easiest way in DeFi to earn variable interests by depositing your tokens or coins into a smart contract or by holding cryptocurrencies on a staking platform by connecting your wallet, similar to having your cash sitting in a traditional interest-bearing bank account. But in a much better way and with interests that are sub-1%.
In the same way, your bank uses your hard-earned cash to make investments and “reward” you over time (with interest rates well below inflation rates), the blockchain protocols you will stake your coins on will put this money to work, and will reward you for it.
How does staking work?
Participants first make an agreement to the cryptocurrency protocol using their wallets and committing some of the tokens required for staking. The protocol selects validators from among these participants to confirm transaction blocks.
You’re more likely to get chosen as a validator if you commit more assets.
New bitcoin coins are produced and paid as staking rewards to the block’s validator every time a block is added to the network. The rewards are almost always the same sort of coin that the players are staking. On the other hand, some blockchains use a different sort of cryptocurrency as a reward.
You must own a cryptocurrency that uses the proof-of-stake model in order to stake crypto, In some cases, Then you can decide how much you want to bet. Some popular cryptocurrency exchanges allow you to do so.
When you stake your coins, they remain in your possession. You’re effectively putting those staked coins to work, and you may unstake them at any time if you want to exchange them. The unstaking procedure may take some time; some cryptocurrencies require you to stake coins for a set period of time.
We can’t go about talking about staking without discussing the 2 most popular “consensus mechanisms” in the blockchain space.
So what is PoW and PoS and what makes them different?
PoW — Proof of Work
If you’re familiar with how Bitcoin works, you’ve probably heard of Proof of Work (PoW). PoW is the mechanism by which transactions are validated and then assembled into blocks. These blocks are then linked together to form a blockchain. In this mechanism, miners lend the computing power of their computers to the network to solve a complex mathematical problem. The first to solve the problem gets the right to add the next block to the blockchain.
As a reward for participating in network operations, the miner receives Bitcoin.
PoW has proven to be an effective innovation for validating transactions in a decentralized network. The problem with this mechanism is that it involves a lot of computing power on the part of miners. Indeed, the cryptographic puzzle they have to solve has no other use than the security of the network. If this justifies in part the energy expenditure associated with these calculations, it is nevertheless legitimate to wonder about the possibility of developing a mechanism that consumes less electricity.
PoS — Proof of Stake
This is how Sunny King and Scott Nadal, two developers, came up with the idea of a new consensus algorithm, Proof of Stake. In this mechanism, participants lock their tokens. The protocol then assigns the right to validate a block randomly to one of the participants. In PoS, the probability of being chosen to validate the block is proportional to the number of locked tokens. Thus, the more locked tokens the user has, the more likely he is to be chosen to validate the transaction.
PoS thus allows for the production of blocks without the need for mining. While mining requires a large investment in hardware and time, PoS simply requires an investment in crypto or coin that is using this mechanism.
Instead of competing to validate a block, participants in a PoS-based network are selected based on the number of tokens they stake.
This stake encourages participants to maintain the security of the network because if they fail in their mission, they can lose everything. Indeed, an error in the validation of a transaction leads to a penalty and the total or partial destruction of the tokens put into play.
In layman’s terms, staking consists of buying a coin and then keeping it in an appropriate wallet.
All the people who participate in securing the network are rewarded for this.
If you’re interested in a DeFi platform where you can stake and get rewarded -> check this out