Amid the coronavirus crisis and poor economic situation in 2020 that continue its influence in 2021, many people face the need to find additional sources of income. One of these sources — cryptocurrency staking — has gained exceptional popularity.
Here we explore how to stake digital assets, the role of decentralized finance (DeFi) played in the growth of staking popularity and how to start earning money on it.
What is staking and how it works
Staking is a process of holding digital assets with a goal to receive rewards. To start earning this way, one should purchase crypto and find a lucrative offer for passive income.
Staking is possible with cryptocurrencies built on PoS (proof of stake) and DPoS (delegated proof of stake) algorithms. Technically, the process looks the following way:
- A user purchases cryptocurrency and stakes it to a bigger crypto holder in the network that needs processing power for internal processes, for example validating transactions.
- Bigger cryptocurrency holders who provide the network with processing power get rewards from the charged transaction fees and new coins emission on the digital asset network.
- The network distributes rewards between the holders based on the volume of assets that are held on their wallets. The more coins the holder has, the bigger is the maximum reward. Bigger holders share rewards with stakers based on the volume of staked assets.
Interesting fact! Staking is beneficial not only to users. The project representatives and crypto community also derive benefit from it. One of the advantages of cryptocurrencies that are available for staking is the reduced risk of panic selling. The possibility to earn on holding cryptocurrency stimulates users to hold assets on the account. As a result, the prospect of continuing to get income via staking reduces the probability that holders will actively sell coins should negative news appear in the media. This approach allows growing the stability of the exchange rate that makes the currency more attractive for investors.
DeFi approach to staking
Staking was given a new form with the decentralized finance segment projects. DeFi startups focused on widening the options for earning on holding cryptocurrencies, including schemes when the funds are locked for the projects needs.
Let’s explore one of the most popular scenarios:
- Developers create a decentralized protocol allowing to issue loans.
- To start operating, the project needs funds for issuing loans. To get the funds, developers attract the crypto community that has coins.
- The users’ funds are locked for the projects needs.
- Borrowers get loans at interest. The deadlines are fixed in the system.
- When the borrowers pay back loans, the investors whose funds are locked for the projects needs get their profit (as a result of the interest paid by the borrower)
An example of such project is MakerDAO. As of the end of March 2021, this decentralized protocol ranks first by the total value locked for its needs among projects in the DeFi market.
Top 10 DeFi projects by the total value locked for the projects’ needs. Source: DeFi Pulse
Advantages and disadvantages of earning on DeFi staking
There are different points of views on staking crypto on the internet. Some crypto community members emphasize the possible challenges the stakers might face. Let’s dive deeper into the advantages and disadvantages of DeFi staking.
Advantages
- Low entry barrier, compared to other ways of earning money on cryptocurrencies, including mining. To start staking, it is not necessary to purchase additional equipment. Also for the launch of the functioning scheme, there is no need for substantial financial investments.
- Staking can be seen as an alternative to other more risky ways of earning money on cryptocurrencies. As opposed to mining digital assets or trading, staking can bring stable income.
- The process of staking is almost fully automated. The user that wishes to earn on staking crypto does not need to constantly control the operations. The biggest part of the “deal” between the holder of the coins and the platform for the needs of which the assets are locked is built into the smart contracts — the digital analogue of agreements that controls the compliance with the terms of agreements and automatically settles the payments.
Interesting fact! Recent DeFi projects offer solutions for earning on locking coins that are based on mining algorithms. For example, it is possible to stake the biggest currency by market capitalization, Bitcoin (BTC), via decentralized protocols. Let us recall that BTC operates on the energy-demanding PoW mining algorithm, which is fundamentally different from PoS and DPoS algorithms. In order to stake Bitcoin, the assets are converted into wBTC — the cryptocurrency analogue on the ERC-20 standard.
Disadvantages
Not all DeFi projects are reliable. Unfortunately, sometimes there are news on the internet about successful hacker attacks on decentralized startups. The risk of losing assets while staking on DeFi projects can be mitigated by avoiding dealing with unverified platforms.
Some believe that another disadvantage of staking is the limited level of profit. In most cases, it is possible to earn 5–15% annually on staking crypto.
How to earn on staking in a smart way
Finding lucrative and secure way of earning profits on staking crypto does not necessarily mean spending much time selecting projects by yourself and diving deep into their details. There are platforms on the market that have professional teams focused on listing the most lucrative offers.
An example of such a platform is Tidex. Users that want to start earning on staking crypto should take a closer look at this platform for the following reasons:
- There are plenty of available lucrative offers for starting staking crypto all in one place with profitability up to 50%.
- The platform regularly adds more offers on holding coins.
- The platform does not charge fees for staking.
- The project ensures the security of the operations. As opposed to many platforms that can be chosen for starting staking crypto, Tidex developers went an extra mile for minimizing the risks of the operating processes.
- Tidex is a multifunctional ecosystem that includes the exchange where users can convert earned coins to other digital assets at a favourable rate without a need for a third-party platform. This approach helps to save time and effort.
Another advantage of the Tidex platform is the availability of alternative offers of earning on cryptocurrencies. For example, Tidex referral program members can get up to 30% on commissions charged from the users they invited.
Summary
Staking crypto got a significant acceleration amid the growth in DeFi popularity. Operating in the decentralized finance market might be fraught with challenges. To avoid difficulties, the users that would like to earn on staking crypto should use specialized platforms like Tidex.
