Staking has been used fluently to describe various actions in the world of crypto, from locking your tokens in a decentralized finance application (DeFi) or a centralized exchange (CEX) to using tokens to run a validator node infrastructure on a proof- of Stake (PoS) network.
PoS is one of the most popular mechanisms that allow blockchains to validate transactions, and it has emerged as a credible consensus mechanism as an alternative to the original Proof-of-Work (PoW) used by Bitcoin.
Miners require a lot of computing power to run the energy-intensive PoW, while PoS requires coin staking as collateral to validate blocks and verify transactions, which is significantly more energy efficient and carries less centralization risk. These are some of the reasons why companies like Mozilla have changed their donation policies to only accept PoS crypto donations in line with their “climate commitments”.
The Ethereum protocol is expected to transition to a PoS consensus mechanism before the end of the year. On the network scaling roadmap, the merge feels right around the corner. Ethereum miners need to mine another cryptocurrency or switch to staking if they want to continue securing the network.
Dogecoin also has plans to make this transition in the future.
Staking rewards are incentives offered to blockchain participants for validating new blocks. There are several ways one can participate in staking within the crypto ecosystem:
Run your own validation node
Proof-of-Stake allows anyone with a computer to run a node and validate transactions by participating in the consensus of the chosen blockchain. Validators are randomly assigned to verify a block.
Validators need to build their own staking infrastructure to run a node. Depending on the network, being a validator can have a high upfront cost as a set amount of tokens must be stacked before going live.
As long as the validator node is active, the tokens being staked are both locked and yielding. Running your own node can be complicated and technical for beginners, and if done incorrectly, it can lead to financial losses of the tokens at stake.
Delegate to a validator
Tokens from PoS networks can be assigned to third parties to allow them to run their own node and validate transactions. This is a less complicated method than running your own node, but involves delegators joining a staking pool and trusting the chosen validator with their tokens.
Projects like Stake.fish offer staking as a service to ensure the legitimacy of these validators. The founder of Stake.fish’s validation services was also a co-founder of f2pool, one of the largest Bitcoin and Ethereum mining pools.
Much like running a mining pool, a staking pool requires a robust team of engineers. The main difference lies in the target group. While mining pools focus on miners, staking pools cater to anyone holding PoS tokens. Dasom Song, Stake.fish’s head of marketing, told Cointelegraph:
“Managing and building our own infrastructure is our way of contributing to the crypto ecosystem. We speak to projects, research ecosystems and listen to our community to make a decision on new chains to support.”
Both running your own node and delegating to a validator are some of the safest ways to earn an active return on your tokens, but come at the cost of making your assets illiquid for a set period of time.
Related: Ethereum 2.0 Staking: A Beginner’s Guide to Staking ETH
Liquid staking
Several projects have emerged in recent years that offer token holders an alternative to staking pools and solve the illiquidity of staking while helping to validate the network.
Lido (LDO), the highest ranking protocol after Total Value Locked (TVL), supports multiple blockchains with their high yield tokens such as Ether (ETH), Cosmos (ATOM), Solana (SOL), Polkadot (DOT), Cardano (ADA) and more . It is a non-custodial protocol, but it is not permissionless as the Lido DAO selects validators through governance voting. Stake.fish is one of those trusted validators chosen by the Lido community to support the protocol.
Other projects like Rocketpool (RPL) have decided to only focus on supporting liquid staking for ETH for now. Rocketpool is a permissionless protocol, so anyone can become a node operator.
Although similar in principle, LDO tokens differ from RPL tokens.
These tokens staked with Lido are tied to the original token. This means that 1 ETH equals 1 lido stETH (STETH). This method is similar to yield farming in DeFi, incurring gas costs for harvesting with every transaction.
Rocketpool’s tokens remain a fixed amount of Rocket Pool ETH (RETH), but the value of these tokens increases over time as the decentralized network of nodes earns rewards, making it more cost-effective as it doesn’t require token harvesting.
Liquid staking was created with DeFi applications as the main users of these tokens. Staked tokens have value and can be used as collateral for many decentralized applications to generate a return on top of staking rewards.
The first and most important use in DeFi right now is to provide exit liquidity for these liquid staking protocols via liquidity pools. Curve Finance’s liquidity pool of ETH + STETH tokens allows STETH to be exchanged for ETH until the merger is complete. RETH also has a liquidity pool in Curve Finance.
There’s even a liquidity pool that allows for swaps between STETH and RETH with more than $100 million in assets pinned to Convex Finance.
Lock tokens in a DeFi protocol
Protocols in DeFi can incentivize participants to lock their tokens in exchange for rewards in the form of earnings. This can be done for lending and lending protocols like Aave (AAVE), to provide liquidity on a decentralized exchange (DEX) like Uniswap (UNI) or SushiSwap (SUSHI), and to support governance-related operations of decentralized autonomous organizations (DAOs). .
Governance has seen the most innovation related to staking, as the Vested Escrow (VE) model has been used by many DeFi applications to align community interests and incentivize long-term awareness of the protocol.
Curve Finance has attracted a lot of attention with the use of this mechanism, as Curve’s native token (CRV) is escrowed in escrow for periods ranging from one week to four years; The longer the contract, the greater the voting power of the VE token.
Two things move the DeFi world:
• Liquidity
• Incentives
Protocols want liquidity and we want incentives. We say we’re in for the tech, but we’re also greedy.
Protocols understand this. They fight for our liquidity and motivate us with creative rewards.
— Ross Booth (@rossboothr) March 9, 2022
Colloquially referred to as “Curve Wars” in DeFi, protocols like Convex Finance have built a structure around this mechanism to influence the allocation of Curve Finance token rewards and position themselves as the main liquidity providers for CRV governance tokens, making it the 6th largest DeFi application at $12.26 billion TVL, according to data from DeFi Llama at the time of writing.
Related: Crypto Staking: How to Choose the Best Staking Coins for Passive Income
Staking through a CEX
Centralized exchanges offer several of the above staking options in a traditional way with custody and permission. The exchange will stake the tokens on behalf of users and will charge a commission in return for the stake services.
Binance, the largest crypto exchange, allows users to stake their tokens for a locked period or in a liquid manner, depending on preference and hunger for returns. For those users who are staking ETH, the platform will provide exit liquidity in the form of a Binance ETH (BETH) token until the merger occurs. Binance recently launched a new TerraUSD (UST) staking program for more than 30 million users.
Kraken, another leading exchange, offers staking services but does not offer an exit liquidity option. Those users who stake ETH will have to wait until after the merger to get a liquid asset. It also recently announced the acquisition of non-custodial staking platform Staked for an undisclosed amount, in what it described as “one of the crypto industry’s largest acquisitions to date.”
Locked tokens that generate a return
Staking comes from PoS but has gained its own prominence in DeFi and crypto overall. At the time of writing, any token that is either locked to support a network via a validator or used in a decentralized application is considered stacked.
The above examples show the different ways to place tokens and they all have different implications and characteristics. Token staking provides a strong foundation for generating revenue while contributing to a network’s overall ecosystem.
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