DeFi staking

In the crypto world, staking is part of the process of securing a 'Proof of Stake' blockchain.

(To learn more about 'Proof of Stake' security, check out my writeup on blockchain security.)

Here's an overview of how staking works:

  • 'Proof of Stake' blockchains (such as Ethereum) require the participation of validators to keep the blockchain secure.
  • Validators are paid for their effort.
  • To become a validator, one has to put up (i.e. stake) some amount of cryptocurrency as collateral. For the Ethereum blockchain, one needs to stake a minimum of 32 ETH.
  • Since this can be relatively costly, people have set up 'staking pools' where anyone can participate by staking a small amount of ETH. So instead of one person staking 32 ETH on his own, you could have hundreds of people each providing a small amount of ETH and sharing the profits of being a validator.

So in simple terms, staking involves putting up some crypto as collateral and earning a yield on it.

Two of the most well-known Ethereum staking pools are Rocket Pool and Lido. You can also stake your crypto in centralized exchanges like Binance and Coinbase.

Staking yields

Staking yields vary across blockchains.

With Ethereum, the staking yield depends on the amount of ETH being staked. The more ETH is staked, the lower the yield (and vice versa).

ethereum staking yield

Staking is a good alternative to lending because the yield is generally higher without a substantial increase in risk.

DEX token staking

Decentralized exchange (DEX) token staking is a special category of staking.

Here, you're not staking cryptocurrency to secure a blockchain. Instead, you're staking to help the DEX operate more effectively.

An example of DEX token staking can be found on Sushiswap. There, you can stake its native SUSHI token to receive a yield (of approximately 8.63% at this time of writing).

sushiswap staking

Generally speaking, DEX token staking is riskier than regular staking. Accordingly, the potential return tends to be higher as well.

Staking risks

Staking is relatively safe, but there are still risks to it:

  • The staking smart contract can be poorly designed, leading to unintended lost coins. In the worst case, the staking pool can be an outright fraud and the operator runs away with everyone's staked coins. To avoid this, only stake with large established blockchains, pools and/or centralized exchanges.
  • If the price of your staked coin/token goes down, the staking yield may not cover for the fall in price.

In general, DeFi staking offers higher yields than lending, but it comes with additional risk.

If you've done your research and know what you're doing, staking can be a good way to grow your capital.

But if you're looking to take on more risk for even higher returns, you might want to check out liquidity pooling.

Next: Liquidity Pooling