How to earn with crypto – What is staking?
Staking is a way to earn rewards on your cryptocurrency by lending your tokens to various DeFi protocols for a time. Staking will lock up your crypto while it’s in the hands of the DeFi protocol, meaning you won’t be able to trade or sell it while it’s locked, but you remain the owner of the crypto and retain complete control over when you choose to un-stake the funds. A few DeFi protocols have a minimum required duration for staking and may impose a fee for removing your coins early, but most allow you to come in and out of staking at your convenience. DeFi protocols are incentivized to get stakers for their protocol because it supports their day to day operations so they will often pay out large amounts of interest for people who offer staking support, which is why staking can be so lucrative for the DeFi investor.
You will hear staking used to describe two entirely separate systems, one for supporting individual DeFi protocols and the other for supporting large blockchain networks, but both types of staking involve locking up funds to support the system or project for a reward. Staking to support a blockchain network gets its name from an algorithm known as Proof of Stake. There are a few different types of algorithms that developers use for verifying and securing blockchains, Proof of Work being a popular one, but Proof of Stake is becoming increasingly popular due to its lower energy requirements. In a Proof of Stake network, each node is required to own a relatively large amount of the network’s token to prove they are acting in good faith and to earn the right to validate transactions. Running a node on a Proof of Stake network entitles the owner to a share of the profits from validating transactions. Since running a node requires a large amount of currency, these nodes can gather money from anyone willing to lock up their tokens, which means individuals with relatively small pockets can also participate in a Proof of Stake network and earn rewards from validating transactions.
To recap, you can either stake crypto in DeFi protocols to support that project in their daily operations, or you can stake crypto on a blockchain that uses Proof of Stake to validate its transactions in return for rewards. Validating transactions on a blockchain in exchange for crypto rewards is also known as crypto mining.
Getting involved in Proof of Work mining requires specialized knowledge about computer systems, hardware, software, and blockchain tech. Staking into Proof of Stake networks can be less complex because developers create software to make it easy for anyone to lock up funds, but it’s rarely an easy process. Staking crypto into DeFi protocols is also very difficult, requiring specialized knowledge in self-custodied crypto wallets, fiat to crypto management, smart contract interactions, auditing source code and business fundamentals, tracking positions and performance, and more. Although DeFi staking can be difficult to do correctly, it can provide participants with significantly greater monetary returns than fiat-based accounts. Of course, there are attendant risks – no deposit insurance, no regulatory certainty, no collateral security, no clear counterparty support, risk of cyber attack, code flaws and bad actor events.
Staking is not available for all cryptocurrencies or all blockchain networks. Some popular crypto exchanges offer pseudo-staking services that can pay anywhere from 1% to 5% interest, but not all exchanges offer this service and the ones that do are keeping the lion’s share of yield for themselves. For example, in DeFi you can earn up to 20% for staking a stablecoin such as USDT or USDC, where centralized crypto platforms may offer only 1-2% on the same token. Although these platforms make staking easier, they are not passing the majority of profits to crypto investors.
Staking crypto provides benefits to investors who are planning to hold their crypto for the long haul by hedging against token price volatility, earning additional rewards while they “HODL” (hold long positions in crypto, even through dips and spikes). The benefits of staking crypto can be immense but unfortunately these benefits are unavailable to most individuals due to the complexities of staking crypto on-chain in live DeFi protocols.
Giddy provides anyone the opportunity to stake into DeFi protocols while keeping the majority of rewards for themselves. Giddy takes small service fees on transactions, not massive portions of the principle being earned. There are no penalties for short-term staking, and whatever you earn is yours to keep.
What are the biggest logistical challenges average investors face with staking?
There are three major logistical challenges that all boil down to one thing: user experience. It’s hard to secure your wallet’s private key, it’s hard to get money onto DeFi-enabled blockchains, and it’s hard to interact with smart contracts. Right now DeFi investors have to master multiple tool sets across multiple websites before they can begin to invest, and then they have to master the DeFi economy to find good projects to stake in.
How does a sophisticated investor monetize their crypto compared to what the average investor is doing (or not doing)?
Sophisticated crypto investors are using the blockchain to turn their crypto into a productive asset while the average investor can only speculate on the pries of tokens available in centralized exchanges. While the average investor buys Bitcoin hoping that someone else pays more than they did for it, sophisticated investors are yield farming, lending crypto in DeFi protocols, providing liquidity to exchanges, and collecting NFTs.