In recent years, blockchain technology has not only become a hot topic and trend globally, if not an investment tool and a fundamental vertical to work towards and foster financial inclusion. Decentralized Finance (DeFi) is getting a dominating position in the financial market and coming strong than ever to take over.
This article aims to give you an overview of what’s happening and why is important, so, let’s find out DeFi and Staking.
What is Decentralized Finance and DeFi Staking?
DeFi is a general term for financial products and services that can be used and accessed by anyone using only blockchain — anyone with an internet connection can access it, and no one can prevent it. DeFi allows you to do most of the things banks support — earn interest, borrow, lend, buy insurance, trade derivatives, trade assets,.. — but faster and requires no paperwork or middlemen.
So, we know now what DeFi is, but what is DeFi staking?
DeFi Staking is the process of actively participating in transaction validation (similar to mining) on a proof-of-stake (PoS) consensus blockchain. On these blockchains, anyone with a minimum-required balance of a specific cryptocurrency can validate transactions and earn Staking rewards for doing so. For a lot of traders and investors, knowing that staking is a way of earning rewards for holding certain cryptocurrencies is the key takeaway.
Types of DeFi Staking
Staking is an increasingly popular and less resource-intensive alternative to proof-of-work (PoW) mining, which is another way of verifying crypto transactions and adding them to the blockchain, but with very high level of energy-consumption.
The concept is virtually the same as traditional staking. Users hold a certain amount of tokens to generate passive income. As it is not as resource-intensive as mining cryptocurrency, DeFi staking is far more accessible for people who are new to cryptocurrencies.
Similar to bank loans, where banks use the money of its customers and borrow it to other customers giving back some interest, customers who deposit money in yield farming protocols will enjoy the interest generated by the underlying lending protocols. Within this model, crypto holders become the “banks”, who use “free label crypto” in an exchange or hot wallet to provide liquidity in decentralized financial protocols.
The flexibility that combines 24/7 access to the market, smart contract automation, and no middleman creates a variety of DeFi staking strategies that help the productive farmer looking for a generating project Make more profit by moving between multiple DeFi protocols.
Liquidity mining takes place when users of a certain DeFi protocol get compensation in the form of that protocol’s native tokens for cooperating with the protocol. It’s the process of depositing or lending specified token assets with the purpose of providing liquidity to the product’s fund pool and obtaining an income afterward.
Participants have to offer their crypto assets to liquidity pools in DeFi protocols for the purpose of crypto trading. However, it is important to note that participants do not offer crypto assets into liquidity pools for crypto lending and borrowing in the case of liquidity mining. Investors place their crypto assets in trading pairs such as ETH/USDT, and the protocol offers a Liquidity Provider or LP token to them.
In addition, investors also have the LP token from the first stage of locking their crypto assets into the liquidity pool. It is important to note that the reward in liquidity mining depends profoundly on the share in total pool liquidity. Furthermore, the newly minted tokens could also offer access to governance of a project alongside prospects for exchanging to obtain other cryptocurrencies or better rewards.
Drawbacks of Staking
Impermanent loss is a loss that funds are exposed to when they are in a liquidity pool. This loss typically occurs when the ratio of the tokens in the liquidity pool becomes uneven. Although, impermanent loss isn’t realized until the tokens are withdrawn from the liquidity pool. This loss is typically calculated by comparing the value of your tokens in the liquidity pool versus the value of simply holding them.
To keep integrity, decentralized networks need transaction validators. These transaction validators are called “network nodes”, and they verify, approve and commit around 130 transactions every 10 seconds. This strict limit is defined to protect the network from potential attacks in decentralized systems.
Like any financial service provider, nodes require a fee to secure operations; this fee is known as gas, and users can prioritize the addition of their transactions to the network in the network by increasing the amount of gas they send as payment to the network nodes.
As blockchains like Ethereum gain popularity, and more DeFi applications are adopting it, the transaction number grows significantly; this means that appplications and individuals have to compete for their transactions to be accepted congesting the network, therefore, raising the gas prices.
With its immutable characteristics, no intermediaries, high interoperability, accessible anywhere and by any method DeFi has ushered in a new financial era where all transactions are transparent and open source.
Above are the basic concepts of decentralized market, hope we can help you better understand and grasp your crypto investment opportunities.
About Dandelion Labs: Dandelion Labs is a blockchain product and research agency that leverages the power of blockchain technology to power the next generation of decentralized commerce, paving the way for evolution and connection to the digital world.
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