Do you ever wonder how crypto whales seem to effortlessly multiply their wealth? Strategically leveraging financial tools to their advantage, staking emerged in recent years as a game changer. Staking has the power to set your portfolio apart unlocking outsized returns using the magic of compounding. In this post, we’ll dive into the world of staking and explore its potential to strengthen your portfolio. At DefiDive we are dedicated to filtering the noise and empowering everyone to make informed decisions.
What is Staking?
Crypto staking involves depositing your tokens in a blockchain to help secure the network and validate transactions. In return for your contribution, you earn rewards, typically a percentage of the fees earned during the staking period.
Just like how you keep a local currency in the bank to earn interest, staking in crypto works similarly.
Alternatively if you are holding stablecoins like USDC/USDT depositing them on lending platforms, just like staking is another way to earn some passive income on your idle coins.
Ways of Staking
1. Staking and Lending on Centralized Exchanges (Technical Expertise: Easy)
Centralized Exchanges (CEX) such as Binance and Coinbase offer staking and ‘earn’ services, where you can stake your token holdings directly on the exchange and earn rewards.
Lending USDC/USDT
USDC and USDT are pegged to the value of the US Dollar, with 1 USDC/USDT representing the value of 1 USD. Stablecoin lending refers to the act of depositing USDC/USDT tokens into various platforms to earn interest. The most common way to do that is through CEX. Some exchanges offer high APR % with a requirement to lock your funds in for a period of time. (see Binance screenshot below)
Pros:
1. Earning Potential
: Lending USDC/USDT often yields higher returns compared to traditional savings accounts.
2. Less Price Volatility: As USDC/USDT are stablecoins, they offer less volatility compared to other cryptocurrencies, making passive income rewards more predictable.
Cons:
1. Liquidity Issues
: Once deposited, your USDC/USDT may not be immediately accessible. Products that offer a high APR may require lock in periods, which can result in delays before funds become accessible again.
2. Counterparty Risks: Lending on a Centralized Exchange means that funds are stored in custodial accounts, where control is given to the platform for fund management. The collapse of FTX should serve as a reminder that there is potential risk for putting your funds on a CEX. Which brings us to the next point…
2. ETH solo staking (Technical Expertise: Medium)
Solo staking is a fundamental part of crypto staking. It involves running an Ethereum node connected to the internet. To start, individuals must deposit 32 ETH enabling the activation of a validator. Participants will then gain the ability to directly contribute to the network’s consensus mechanism and in return, gain rewards for securing and validating transactions that pass through the network.
3. Liquid Staking (Technical Expertise: Medium)
Liquid staking is an increasingly popular way of crypto staking. It involves depositing assets into a smart contract or a staking pool, where they become "liquid" and can be traded or transferred while still earning staking rewards. This process enables individuals to maintain flexibility with their assets while actively participating in staking. By engaging in liquid staking, participants contribute to the network's security and validation, earning rewards in return for their involvement.
When you stake crypto on a liquid staking platform, you will receive a corresponding amount of liquid tokens. These liquid tokens act as a representation of the staked assets which can be freely traded or utilized within DeFi applications.
Top Liquid Staking platforms
1. Lido
Lido is the biggest Ethereum staking pool with a staked amount of 9.5mil ETH to date and currently yields 3.2%. When ETH is staked on Lido, participants will receive stETH as liquid token which has a 1:1 ratio to ETH. Higher interest rate yields will be awarded to those who choose longer staking periods.
2. EigenLayer
There’s a new staking method making waves in the crypto world called ‘Restaking’ with EigenLayer emerging as the leading restaking protocol. As the name implies, restaking enables you to stake your liquid staked tokens to unlock additional rewards.
As an example, you can stake Lido liquid tokens such as stETH into EigenLayer to start earning points. This approach allows you to gain rewards from both Lido and EigenLayer simultaneously maximizing your staking benefits.
3. Pendle
Pendle distinguishes itself by offering users a fixed income yield that remains stable regardless of market volatility, ensuring consistent returns. Many DeFi platforms offering liquid staking provide attractive APRs; however, with rates that constantly fluctuate currently between 1 and 5%, planning ahead can provide challenges. Here is where Pendle sets itself apart: by providing users with a fixed income yield, it guarantees consistent returns regardless of market conditions.
Conclusion
'* No minimum, enough should be staked to justify the cost of transaction fees
Staking presents an opportunity for crypto holders to earn passive income on tokens you are already holding. Whether you choose to stake on CeFi or DeFi applications, it's essential to understand the risks and rewards involved. Staking also means agreeing not to trade or sell your tokens in the short or medium term. This is a strategy for long term holders who recognize the value in the token and its underlying technology and are comfortable with the price fluctuations of the underlying asset.
As the chart above shows, there are plenty of options available for earning additional yield on your crypto assets. Lending platforms are an alternative to staking platforms and will favour portfolios heavier in stablecoins and altcoins.
For a more detailed analysis of Lending platforms, stay tuned and follow us on our socials for a breakdown coming soon. In the meantime, check out DefiDive’s DeFi leaderboard to see a breakdown of the most popular staking and lending platforms on different chains.
