Introduction to DeFi Staking: What is it and How does it work?
DeFi (Decentralized Finance) has been under the spotlight in this past decade. It serves a crucial role while exploring the world of cryptocurrency as it relates to a bigger picture behind crypto without relying on the traditional financial system. Apart from the operation of different famous cryptocurrencies under DeFi, more DeFi projects can be seen setting off on the blockchain-based network, such as Ethereum. In order to talk about the way DeFi differs from traditional investing, an introduction to DeFi Staking might come into the discussion as it has shown great prospects for providing alternatives to centralized investing.
In the following, we will provide a beginner guide to DeFi staking, introduction to DeFi Staking and a DeFi staking explanation, explaining what is DeFi and how it is implemented in DeFi activities and projects.
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What is DeFi Staking?
“What is DeFi staking” will be the very first question of introduction to DeFi Staking. In fact, DeFi Staking means the idea of earning rewards by holding a certain amount of crypto tokens. When crypto holders hold a minimum amount of certain cryptos, their assets can then be used in the transaction validation process of the proof-of-stake (POS) blockchain. To be more precise, the crypto assets will become one of the validators in a DeFi protocol, and generate rewards by accomplishing required tasks on the chain. Some people might as well see DeFi staking as a way to earn a passive income as they can let the proof-of-stake do its jobs and earn the rewards in return by holding the crypto tokens.
The advantage of operating through DeFi staking is mainly the ease of use. Defi staking helps to perform the most complicated tasks so users do not have to manage information and extra tasks, such as private keys, acquiring resources and making trades. And the second main reason is probably that DeFi staking requires only a low fee. Although users will need to bear the same investment risk, they can ensure to maximize possible returns through DeFi staking. In other words, the more crypto assets one holds, the higher the chance will get the returns. Aside from investing in promising cryptos, some investors, especially the long-term crypto holders, will use the staking as an alternative to their investment. Since making the assets for staking is sometimes better than tokens sitting in the crypto wallet and receiving nothing, it is also one of the strategies for some crypto holders to collect generated rewards.
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How does DeFi Staking work?
If DeFi describes earning rewards by holding crypto tokens, then can all cryptocurrencies do staking? Unfortunately, not all kinds of cryptocurrencies are allowed for staking. Popular crypto like Bitcoin and Dogecoin are apparently not within the staking options, as they work under a consensus mechanism called Proof-of-work (POW). Yet, currently, there are some feasible staking options, including Ethereum 2.0, Tezos (XTZ), Algorand (ALGO).
These cryptocurrencies allow staking to go through another consensus mechanism, Proof-of-stake. When the mechanism ensures the tokens have been validated through the POS blockchain process without a traditional bank, a percentage-rate reward will be generated. That is to say, if you choose to stake with your cryptocurrencies, staking will go through a “staking pool” and the POS process, and eventually gain profit returns over time.
However, there is also a noteworthy point to crypto holders who would like to stake their assets. Staking assets involve degrees of risk. During the POS process, your assets used for staking are basically locked up, which means the assets will be “frozen” for a period of time, and they cannot be transferred. In that case, crypto holders can not perform any actions, including trading, to the staked assets. It is always important to bear in mind that you should familiarize yourself with the process before you start staking your crypto assets.
Every investment contains a certain level of risk. You should always evaluate the associated risk level before investing in any of the investment options!
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