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, it is needed to purchase crypto and choose a lucrative offer for passive income.
Staking is possible with cryptocurrencies built on the PoS (proof of stake) and DPoS (delegated proof of stake) algorithms. Technically, the process looks the following way:
- A user purchases the cryptocurrency, the network of which needs processing power like computers for such internal processes as validating transactions.
- A cryptocurrency holder who provided the network with processing power is eligible for a reward due to new coins emission on the digital asset network and сharged transaction fees.
- To equally distribute rewards, the network rates holders by the volume of assets that are held on the wallet. The more coins the holder has, the bigger is the maximum reward.
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, also due to introducing schemes where funds are locked for the needs of projects. Let’s explore one of the most popular scenarios:
- Developers create a decentralized protocol on the basis of which it is possible to issue loans.
- To start operating, the project needs funds for issuing loans. To get these funds, developers attract the crypto community that has coins.
- The users’ funds are locked for the needs of projects.
- Borrowers get loans at interest. The deadlines are fixed in the system.
- After the borrower pays back a loan, the investor whose funds are locked for the needs of the project gets a profit (as a result of the paid by the borrower interest)
An example of the project that functions this way 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.
Advantages and disadvantages of earning on DeFi staking
On the internet, there could be different points of views on staking crypto. Some crypto community members emphasize the possible challenges the stakers might face. Let’s dive deeper into the advantages and disadvantages of DeFi staking.
- Low entrance barrier, in comparison with 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 a stable income.
- The process of staking is almost fully automated. The network 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 to the terms of agreements and automatically settles the payments.
Interesting fact! The most recent DeFi projects also offer solutions for earning on locking coins that are based on other mining algorithms. For example, it is possible to stake the biggest currency by market capitalization, bitcoin (BTC), via some decentralized protocols. Let us recall that BTC operates on the energy-demanding PoW mining algorithm, which is fundamentally different from PoS and DPoS algorithms. For staking bitcoins are converted into wBTC, the cryptocurrency analogue on the ERC-20 standard.
- Not all DeFi projects are reliable. Unfortunately, sometimes the news on the successful hacker attack on decentralized startups appear on the internet. The risk of losing assets while earning on staking with DeFi projects can be mitigated by withdrawing from working with unchecked platforms.
Some also believe that another disadvantage of earning this way is the limited level of profits. In most cases, it is possible to earn 5-15% annually on staking crypto.
How to earn on staking in a smart way
To find a lucrative and secure way of earning profits on staking crypto it is not necessary to spend much time on choosing projects by yourself and diving deep into their details. In the market, there are platforms with professional teams that are focused on listing the most lucrative offers.
An example of such a platform is Tidex. The users that would like to start earning on staking crypto might want to pay attention to this platform for the following reasons:
- There are plenty of available lucrative offers for starting staking crypto at one place with profitability up to 50%.
- The platform regularly updates the offers of earning money on holding coins.
- The platform does not charge fees on staking.
- The project ensures the security of the operations. As opposed to many platforms that can be chosen for starting staking crypto, the Tidex developers went an extra mile for minimizing the risks of the operating processes.
- Tidex is a multifunctional project. Its ecosystem includes the digital assets exchange where users can at any moment convert earned coins at a favourable rate without a need for a third-party platform. This approach helps users to save time and money.
Another advantage of the Tidex platform is the availability of alternative offers of earning money on cryptocurrencies. For example, the referral program members can get up to 30% on commissions charged from the attracted by them new users.
Staking crypto got a significant acceleration amid the growth in DeFi popularity. Unfortunately, operating in the decentralized finance market might be fraught with challenges. To avoid difficulties, the users that would like to earn on staking crypto might use the services of the specialized platforms like Tidex.