Are you looking for a way to earn passive income with crypto? Do you want to take advantage of the booming DeFi sector and its high returns? If so, then you might want to consider DeFi staking.
DeFi staking is a process of locking up your crypto assets in a smart contract and earning rewards for providing liquidity, security, or governance to a DeFi protocol. By staking your crypto, you can earn interest, fees, tokens, or other incentives, depending on the protocol and the asset you stake.
In this post, I will explain what DeFi staking is, how it works, and what are some of the best platforms and projects to stake your crypto and earn passive income.
What is DeFi Staking?
DeFi staking is a form of yield farming, which is a term that describes the act of using your crypto assets to generate income from various DeFi protocols. Yield farming can involve lending, borrowing, swapping, or providing liquidity to different DeFi platforms.
DeFi staking is a specific type of yield farming that involves locking up your crypto assets in a smart contract for a certain period of time and receiving rewards for doing so. The rewards can be paid in the same asset that you stake, or in a different token that represents the protocol or the platform that you stake on.
DeFi staking can serve different purposes, depending on the protocol and the asset that you stake. Some of the common purposes are:
- Liquidity provision: Some DeFi protocols, such as decentralized exchanges (DEXs) or automated market makers (AMMs), require liquidity providers (LPs) to deposit their crypto assets into liquidity pools, which are smart contracts that facilitate the exchange of different tokens. By doing so, LPs enable the smooth functioning of the protocol and earn a share of the trading fees that are generated from the transactions that occur in the pool.
- Security: Some DeFi protocols, such as proof-of-stake (PoS) blockchains or decentralized applications (dApps), require validators or nodes to stake their crypto assets as a form of collateral, which ensures that they act honestly and follow the rules of the protocol. By doing so, validators or nodes secure the network and earn rewards for producing and validating blocks or transactions.
- Governance: Some DeFi protocols, such as DAOs (decentralized autonomous organizations) or platforms with token-based governance, require token holders to stake their tokens in order to participate in the decision-making process of the protocol. By doing so, token holders have a say in the direction and development of the protocol and earn rewards for contributing to its governance.
How Does DeFi Staking Work?
DeFi staking works by using smart contracts, which are self-executing pieces of code that run on a blockchain and enforce the rules and logic of the protocol. Smart contracts enable the creation of trustless and transparent systems that can handle complex financial operations without intermediaries or centralized authorities.
To stake your crypto assets, you need to interact with the smart contract of the protocol that you want to stake on, using a compatible wallet or interface. You need to approve the smart contract to access your crypto assets and then send them to the smart contract address. Once you do that, you will receive a confirmation and a receipt that shows your stake and your rewards.
Depending on the protocol and the asset that you stake, you might receive different types of rewards, such as:
- Interest: Some protocols pay interest to the stakers, based on the supply and demand of the asset that they stake. The interest rate can be fixed or variable, and it can be paid in the same asset that you stake or in a different token.
- Fees: Some protocols pay fees to the stakers, based on the volume and activity of the platform that they stake on. The fees can be a percentage of the total fees that are generated from the platform, or a fixed amount per transaction or block.
- Tokens: Some protocols pay tokens to the stakers, based on the inflation or distribution schedule of the token that represents the protocol or the platform that they stake on. The tokens can be the same as the asset that you stake, or a different token that has its own value and utility.
The rewards that you earn from staking are usually accrued over time and can be claimed at any point, depending on the protocol and the asset that you stake. Some protocols allow you to claim your rewards instantly, while others require you to wait for a certain period of time or meet certain conditions before you can claim your rewards.
To unstake your crypto assets, you need to interact with the smart contract of the protocol that you stake on, using a compatible wallet or interface. You need to request the withdrawal of your crypto assets and your rewards from the smart contract address. Once you do that, you will receive a confirmation and a receipt that shows your unstake and your rewards.
Depending on the protocol and the asset that you unstake, you might face different types of limitations or penalties, such as:
- Lock-up period: Some protocols require you to lock up your crypto assets for a certain period of time before you can unstake them. The lock-up period can range from a few minutes to a few months, depending on the protocol and the asset that you unstake. The lock-up period is meant to ensure the stability and security of the protocol and to prevent sudden withdrawals that could affect the liquidity or the performance of the platform.
- Unbonding period: Some protocols require you to wait for a certain period of time after you request the withdrawal of your crypto assets before you can receive them. The unbonding period can range from a few hours to a few weeks, depending on the protocol and the asset that you unstake. The unbonding period is meant to prevent double-spending or malicious attacks on the network and to allow the protocol to adjust the supply and demand of the asset that you unstake.
- Slashing: Some protocols impose a penalty on the stakers who act dishonestly or maliciously, or who fail to meet the requirements or expectations of the protocol. The penalty can be a reduction or a loss of the stake or the rewards that the stakers have earned. The slashing is meant to deter and punish bad behavior and to incentivize good behavior and compliance with the protocol.
What are the Best Platforms and Projects to Stake Your Crypto and Earn Passive Income?
There are many platforms and projects that offer DeFi staking opportunities, each with its own advantages and disadvantages, risks and rewards, features and functions. Some of the best and most popular ones are:
- Ethereum 2.0: Ethereum 2.0 is the next-generation upgrade of the Ethereum blockchain, which aims to improve its scalability, security, and efficiency. Ethereum 2.0 will transition from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus mechanism, which will allow ETH holders to stake their ETH and earn rewards for securing the network. Ethereum 2.0 staking requires a minimum of 32 ETH and a dedicated node or a third-party service. Ethereum 2.0 staking rewards are estimated to be around 5-10% per year, depending on the total amount of ETH staked and the network activity. Ethereum 2.0 staking is currently in the first phase of its launch, which means that the staked ETH and the rewards are locked until the completion of the upgrade, which could take several months or years.
- Binance Smart Chain: Binance Smart Chain (BSC) is a blockchain that runs parallel to the Binance Chain, which is the native blockchain of the Binance ecosystem. BSC is compatible with the Ethereum Virtual Machine (EVM) and supports smart contracts and DeFi applications. BSC uses a proof-of-staked-authority (PoSA) consensus mechanism, which allows BNB holders to stake their BNB and earn rewards for validating transactions and blocks. BSC staking requires a minimum of 10 BNB and a compatible wallet or interface. BSC staking rewards are variable and depend on the network activity and the fees that are generated from the platform. BSC staking also allows the stakers to participate in the governance of the platform and to vote on proposals and changes.
- Polkadot: Polkadot is a blockchain platform that connects multiple blockchains and enables interoperability, scalability, and innovation. Polkadot uses a nominated proof-of-stake (NPoS) consensus mechanism, which allows DOT holders to stake their DOT and earn rewards for securing the network. Polkadot staking requires a minimum of 1 DOT and a compatible wallet or interface. Polkadot staking rewards are variable and depend on the network activity and the inflation rate of the DOT token. Polkadot staking also allows the stakers to nominate validators or to become validators themselves, and to participate in the governance of the platform and to vote on proposals and changes.