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How to Explore Staking Opportunities for Passive Income in DeFi

UTC by Andy Watson · 6 min read
How to Explore Staking Opportunities for Passive Income in DeFi
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DeFi staking is an advantageous activity and a great way to passively earn an income, but it is not without risks.

Earning income passively without putting in a lot of physical labour is a feature that is not restricted to the traditional finance environment alone. With the introduction of revolutionary concepts like the blockchain and its use cases such as cryptocurrency and decentralized finance, a whole new world to earning passively has been born. One of such solutions that can help you make some passive income is staking.

DeFi disrupts traditional finance (TradFi) institutions by providing easy access to financial tools with better yields. Individuals are in control of their financial responsibilities interfacing directly with protocols without the difficulties of TradFi’s go-betweens. This article explores the opportunities in DeFi staking, the staking benefits in DeFi, and how to passively earn income with various DeFi staking tools and methods.

What Is DeFi Staking?

Staking in DeFi means locking your crypto assets in a DeFi application (dApp) to earn rewards in return. By having your crypto assets locked up in a smart contract protocol, you effectively become a validator for the protocol or network. Validators are important to blockchain networks that run on the Proof of Stake (PoS) consensus mechanism as they rely on validators to maintain the security integrity of the network. In contrast to the Proof of Work (PoW) mechanism that requires a significant amount of energy to compute on-chain transactions, validators in PoS networks stake their crypto tokens to run validator nodes. This requires them to carry out on-chain duties such as transaction blocks creation and validation, as well as maintaining the integrity of the network. Hence, a simple way to explain it will be to say that PoS needs human capital to supply liquidity and validate transactions on the blockchain network.

Essentially, validators are incentivized to behave well and act in the network’s interest or risk losing their staked tokens to slashing if they act maliciously. A staking protocol incentivizes users to keep their crypto assets for the long term. Stakers are rewarded through direct token emissions as well as earn parts of the fees and revenue generated by the DeFi protocol.

How to Explore Staking Opportunities in DeFi?

One of the easiest and safest ways to passively accumulate income in DeFi is via staking, and here are some things to consider when seeking out the best staking opportunities;

Ways of Staking in Crypto and DeFi

  • Direct staking – This involves locking up a given amount of assets to become a network validator. This approach can require huge staking commitments. For instance, staking on Ethereum’s Beacon Chain requires a whopping 32 ETH. This is typically out of reach of individual investors and more focused on institutional investors.
  • Indirect staking allows individual investors to stake their crypto assets and participate in network rewards through staking service providers. Indirect stakers are called delegators. This involves delegating your crypto assets to a selected node validators on the network, and in return for a portion of the validator’s staking rewards.
  • Vaulting allows users to lock in their crypto assets on a protocol to receive equivalent yield-bearing tokens. This newly minted token represents their stake in the protocols vault. Still, it can also be used for other DeFi activities like further staking or bonding on protocols to generate more yields. Yearn Finance‘s yTokens are a typical example of yield-bearing tokens.
  • Bribing allows protocols to influence voting decisions in liquidity pools by incentivizing LP token holders to delegate their voting powers to a certain. Token holders are rewarded for staking their LP tokens to the pool, and the protocol accumulates liquidity. This practice is very common on the stablecoin DEX platform, Curve Finance, where protocols compete for liquidity by bribing veCRV token holders.

Discovering Tokens to Stake

Not every token can be staked. For instance, Proof of Work (PoW) tokens like Bitcoin cannot be staked. Token staking is available primarily on Proof of Stake (PoS) networks. There is a wide range of PoS tokens to choose from. Each offering varying yields. Use solutions such as Frontier to help you discover different staking options for tokens and their corresponding APY. Endeavour always do your research to avoid getting sucked in by high-risk APYs.rns.

Choosing the Right Staking Platforms

Choosing the right DeFi staking platform is as important as the staking rewards. Good staking platforms make your DeFi staking process easier and more efficient. Different DeFi staking platforms provide various staking options and tools. Choosing the platform that aligns with your staking goals will help optimise your yields. Always do your research. The DeFi space is filled with bad actors. Make use of reliable analytics tools like CoinMarketCap or CoinGecko to get information. Using reputable platforms like Frontier makes it easy to carry out DeFi staking activities across multiple blockchain networks from one user interface. Some categories of staking platforms in DeFi include:

  • DeFi staking aggregators – platforms such as Frontier’s iOS or Android apps aggregate several staking options across several blockchain networks for its users to select from and get the best APYs on one single interface.
  • Stablecoins staking platforms – For stakers who are low-risk takers, platforms such as Aave, Compound, dYdX and Curve enable them to stake their stablecoins and earn yield with lower exposure to market fluctuation risks.
  • Synthetic assets staking platforms – Users can stake tokenized forms of derivatives on these platforms. An example is Synthetix which allows users to stake and earn from derivatives options such as stocks and fiat.

Advantages of DeFi Staking

Staking in DeFi can be compared to earning interest on your savings account deposit in traditional financial institutions like banks. However, it offers so many advantages. DeFi staking gives users the opportunity to leverage higher interest rates than is obtainable in traditional savings accounts and other traditional financial products. Moreso, users retain full control of their finances in DeFi. And most importantly, through staking protocols can maintain network security and decentralization. DeFi reduces the incidence of corruption, provides transparency and eliminates hidden fees.

How to Generate Passive Income through DeFi Staking

Using platforms like Frontier, you can quickly put your crypto assets to work without stress. Frontier allows you to access various staking options across multiple blockchains from one single interface. This efficient user approach will enable you to stake your tokens indirectly as a delegator, choosing from multiple validators and earning significant APY returns at no fees. Frontier also acts as a bridge to various DeFi protocols like Aave, Uniswap, etc., giving you direct access to these platforms from one interface. You can also stake and track your assets directly in your non-custodial crypto wallets through Frontier by easily connecting your multiple wallets to the Frontier app.

DeFi staking is an advantageous activity and a great way to passively earn an income, but it is not without risks. For instance, risks associated with staking include slashing, impermanent loss, malicious attacks and hacking, smart-contract bugs, etc. Hence, it is always essential to do due diligence before using any protocol and stick to reputable and trusted platforms for your DeFi activities.

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Andy Watson
Author Andy Watson

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