What is DeFi staking
Decentralized finance has given the cryptocurrency world new tools to create passive income. DeFi-stacking has become a trend in 2020-2021. This concept has gained more recognition as it allows users to earn a steady income by contributing cryptocurrencies to decentralized finance protocols. The tool requires no trades or transactions. Profitability depends on the terms of the platform and the type of cryptocurrencies invested.
What is DeFi stacking
The concept of depositing one’s digital coins into a protocol has been around for several years. It is a way to encourage users to accumulate cryptocurrencies. In return, holders of coins and tokens will be rewarded with a percentage of the deposit. Compared to the returns of a regular savings account, the payouts for stacking are more attractive. The concept is almost the same as traditional finance: Users hold a certain amount of altcoins while earning passive income. DeFi platforms manage the reserved assets, thereby encouraging the industry to run at full capacity.
How it differs from conventional stacking
Proof-of-Work blockchains require a lot of energy-intensive computation to make a transaction valid. And the Proof-of-Stake mechanism requires validators and their nested crypto-assets. Nodes in Proof-of-Stake chains are entitled to be rewarded for block creation and validation. This incentivizes desirable behavior in the network. In the narrowest sense, stacking is the blocking of crypto-assets in exchange for becoming a validator in a Tier 1 blockchain and receiving rewards for performing node responsibilities.
In a broader sense, DeFi-stacking is often used as an umbrella term for all transactions that require the temporary investment and retention of digital coins in a protocol.
While there are variations, the purest form of stacking involves blocking altcoins so that their owner becomes a validator in a Proof-of-Stake (PoS) network.
A common blockchain in DeFi is Ethereum. It is the first blockchain to deploy smart contracts. Ethereum runs on the Proof-of-Work consensus mechanism, where transactions are confirmed by miners. There is no stacking. However, during 2020-2022, Ethereum is scheduled to migrate from the outdated Proof-of-Work algorithm to Proof-of-Stake as part of Ethereum 2.0.
The problem with this direct stacking approach is that the staking requirements are often quite high. For example, to become a validator in Ethereum 2.0, you need to post 32 ETH (about $40k as of August 2022).
Service providers have emerged in the marketplace that allow ordinary people to circumvent the high financial requirements. They assemble pools to bring together different crypto-investors to participate in the management of the network and receive rewards. The system allows people to deposit any number of digital units and earn passive income depending on how much of the pool is their deposit. Most large centralized and decentralized exchanges already have a stacking feature.
Differences from lending
Both concepts allow users to earn cryptocurrencies, but the risks and returns of the tools are different. In stacking, investors agree to put money into the network (the protocol) to help it validate transactions. With lending, users lend their cryptocurrencies in exchange for interest payments.
Investment risks
Despite all the appeal, DeFi-stacking has some disadvantages:
- Loss of liquidity. If a user stacks a coin on an exchange with very low volumes, it will be difficult for him to sell his asset or convert profits into any stable coin. Choosing a liquid cryptocurrency with high trading volume on the exchange for stacking will help reduce this risk.
- Loss of assets. This can happen due to users’ own negligence, hacker attacks, or fraud. To avoid losses, you should choose a platform with better security features.
- Gas prices. This disadvantage is due to the limited scalability of the current generation of Tier 1 blockchains, especially Ethereum, which is most applicable in DeFi. The complexity often leads to spikes in gas prices, making transactions expensive. To fix the problem, Ethereum programmers are developing a viable solution – the Ethereum 2.0 network.
- Volatility risk. Coins and tokens can lose or gain value in a short time. The bitcoin exchange rate is also a driving factor for the entire crypto market to rise or fall in value. If the price of a coin or token sent to the stack falls sharply, the user risks selling his or her assets at a loss.
- Lock-in periods. These are times when an investor cannot use their cryptocurrencies. If prices fall, there is no way to sell assets quickly. As a result, there could be losses. The best option is to bet coins without a lock-in period to avoid risk.
Platforms with DeFi-stacking
Staking Rewards is a leading provider of data for decentralized finance tools. The platform tracks about 210 assets with an average interest rate of 9.7%. All of these cryptocurrencies participate in staking on various platforms.
Binance
The world’s largest crypto exchange by trading volume and one of the most popular cryptocurrency platforms for passive income. Binance allows you to send to stacking the assets that the user holds in his internal wallet. Two types of participation are available on the platform:
- Fixed Stacking. Allows blocking crypto-assets for a predetermined period of time. The period of freezing can be from 1 week to 3 months. Users store these assets in their cryptocurrency wallet, thus improving blockchain performance. The assets can be withdrawn from the program at any time, but interest is accrued only when the conditions are met.
- DeFi-stacking. Allows you to contribute shares to decentralized finance projects. However, these investments come with higher risks. The return depends on the digital asset that the user sends to stacking. However, there is a trend: new coins and tokens yield higher percentages than well-known cryptocurrency brands such as BNB and ETH. The Binance exchange supports the most popular altcoins, so up to 100 different digital assets can be stacked.
In terms of security, Binance is one of the safest stacking platforms because it is centralized. Users’ funds are stored on the balances of the platform and are protected by the SAFU Fund, which provides insurance coverage in case of a serious hack.
PancakeSwap
This is a decentralized exchange on Binance Smart Chain. PancakeSwap competes with the main DEX on Ethereum Uniswap. CAKE is the platform’s own token. PancakeSwap operates on the AMM model. The term refers to an automated market maker, a decentralized exchange protocol that does not require an order stack, but relies on a mathematical formula to set asset prices.
Trading on PancakeSwap takes place through liquidity pools filled with users’ funds. PancakeSwap allows investors to farm their management token. You can contribute your own cryptocurrencies to the liquidity pool and earn CAKE as a reward.
Only PancakeSwap management tokens can be sent to stacking on the platform. The feature is available in the Syrop Pool section. The annual percentage yield (APY) on the PancakeSwap platform reached about 75% in December 2021. By June 2022, it had dropped to 4%.
In order to transfer CAKE tokens into a smart contract, you must first set up a MetaMask or Trust Wallet and fund it with some BNB to pay commissions. The cost of transactions in the Binance Smart Chain blockchain is significantly lower than in Ethereum.
Venus.io.
This is a decentralized lending platform on Binance Smart Chain. Venus also runs on the AMM system, accordingly, needs liquidity providers. Users can send stacking tokens available on the platform (e.g. BNB) and mine XVS provided for network members, while receiving incentives. To become a liquidity provider on the Venus platform, Metamask must be launched and connected to Binance Smart Chain. You will also need to top up your wallet with BNB tokens to pay network fees.
SushiSwap
This is a decentralized exchange for exchanging tokens and making money using the AMM system. The Ethereum-based platform is an extended fork of the Uniswap protocol. SushiSwap encourages liquidity providers to bring tokens to the platform, rewarding them with a commission earned from user transactions. As of June 2022, SushiSwap is ranked 16th by DeFi Pulse (a website for analyzing and tracking decentralized finance protocols) and has a total of about $380 million in secured assets. By comparison, competitor Uniswap is ranked #2 with a $7 billion market share.
All members of the SushiBar pool are allocated 0.05% of the total trading volume of SushiSwap. SUSHI is an exchange token issued by liquidity providers. The main purpose of this cryptocurrency is to manage the community. The token can be obtained for providing liquidity to pools on SushiSwap. The SUSHI digital unit is transferred in exchange for xSUSHI tokens. To make transactions with the digital units of the exchange, a MetaMask wallet and ETH coins will be required to pay commissions.
The platform offers an annual percentage yield (APY) of about 11% for stacking SUSHI. Users can withdraw SUSHI stacking fees or withdraw their tokens from the platform at any time. The only downside to SushiSwap is the cost of gas for interacting with the Ethereum platform.
How much you can earn
DeFi-stacking is the process of locking cryptocurrencies into a decentralized finance project’s smart contract in exchange for control tokens. By placing digital assets, users essentially become validators of the network (protocol). Each smart contract or blockchain relies on participants because it needs to ensure its own security. For transferring cryptocurrency to the stack, people support and protect the ecosystem and are rewarded in return.
For example, if an ETH owner locks his coins into a smart contract, he will receive Ethereum 2.0 protocol tokens for his role in creating a secure environment. In addition to direct rewards for placing these digital units, investors can also earn a percentage of revenue from products and services offered by the platform. For example, participants in liquidity pools can expect to earn a percentage of commissions from swaps (exchange transactions). This percentage varies daily and depends on the cryptocurrency markets that users add to the pools
