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Here's everything you need to know about a less resource-intensive alternative staking, that involves holding funds in a cryptocurrency wallet to support security.

 

Table of Contents

What Is Staking?

How Is Staking Different from Yield Farming?

How Are Staking Rewards Calculated?

Frequently Asked Questions About Staking

Final Thoughts

 

What Is Staking?

You can think of staking as a less resource-intensive alternative to mining. It involves holding funds in a cryptocurrency wallet to support the security and operations of a blockchain network. In a nutshell, staking means locking up cryptocurrencies to earn rewards.

Most of the time you can stake your coins directly from a crypto wallet like Trust Wallet. On the other hand, many exchanges also offer to stake services to their users. All you have to do is keep your coins on the stock market. We will talk about this in more detail later on. Briefly speaking, staking is a period of time where you lock an asset for a certain period of time in exchange for token rewards, usually as compensation for doing some useful activity or taking a certain level of risk. The rewards vary based on various factors such as the rate of coins you stake and the time you stake them. Protocols can encourage staking for different reasons:

 

- Protocol staking:  Staking is encouraged to maintain protocol security, facilitate decentralized management, and/or act as a distribution channel for protocol gains.

- Liquidity staking: Locked assets increase liquidity in the market and therefore contribute to minimizing price volatility.

- Network staking:  In Proof-of-Stake (POS) blockchains, block transactions are verified by miners who stake their cryptocurrencies on the network.

 Staking can also serve a combination of these purposes, which we discuss below.

 

Protocol Staking

Locking down your assets can help keep a protocol running smoothly and securely. It can facilitate decentralized management or act as a distribution channel for protocol gains. For example, locked assets in lending and borrowing protocols like Aave help share liquidation risks. In return, the shareholders receive a share of the protocol fees. If something goes wrong, the stake will be used as insurance and therefore reduced to normalize the protocol.

 

Protocol operations and decentralized governance often go hand in hand:

  • You also qualify for management rights, AMM fees, and profits from the positive shift to the riveting $1inch to 1inch protocol.
  • When you stake $CRV governance tokens on Curve, you are given $veCRV, which simply means “vote-deposit CRV”. Hold Stakers$ and CRV are offered several administrative privileges, as the winner of the Curve DAO fee on proposals and an additional 50% administrative fee on voting trading.
  • Staked $ZRX can be used to market on 0x protocol.
  • Staked $UMA helps ensure accurate price predictions in the UMA protocol.

Other protocols with similar staking incentives include Balancer, Kyber, and SushiSwap.

 

Liquidity Staking

Staking rewards can also be used as an incentive to increase liquidity and ensure price stability. This type of staking is often referred to as “liquidity mining” and is a popular feature in decentralized exchange (DEX) and automated market maker (AMM) protocols such as Uniswap, Sushiswap, Balancer, and 1inch, as well as stable coin protocols such as Ampleforth, Liquidity.

 

When you deposit assets in a liquidity pool and stake your tokenized pool shares, you get a chance to earn both trading fees and staking rewards. This is because as a liquidity provider, you face asset risk. For this "work" you will be rewarded with:

  • Trading fees, for example, Uniswap V2, offer a 0.03% fee to anyone supplying liquidity to a coin pair.
  • Sharing rewards in the form of governance tokens.

For example, when you contribute liquidity to the DPI/ETH Uniswap pool and stake your DPI/ETH stakes, you will be rewarded with $INDEX, the management token that supports the Index Coop DAO.

 

Network Staking

Network verification is one of the oldest staking functions.

First, let's do a quick introduction to how Proof of Work blockchains like Bitcoin come to a consensus. In PoW blockchains, validators are known as "miners" who solve complex mathematical puzzles to verify transactions. As a reward for their computational work and service expenses that go into running a mining node, they are paid as network tokens. In 2012, it might have made sense for you to run a bitcoin mining operation from your college dorm room. But right now, the process is so energy-intensive that it is dominated by conglomerate mining farms, which sometimes use more electric power than any other country.

 

Enter Proof of Stake (PoS) blockchains. Here, unlike PoW blockchains, validators are selected and rewarded based on the proportion of tokens they hold on the network. Theoretically, anyone can bet and win. But staking for network verification isn't always easy. For example, Ethereum 2.0 has a minimum stake of 32 ETH. However, not everyone has that much ETH or the technical know-how to really set up a node.

So, Defi protocols and some centralized exchanges can act as a staking principal where they remove technical difficulties and act as a network validator on your behalf. Your only job is to lock the assets in your wallet.

 

Combined Staking Strategies

Decentralized finance is about programmable, malleable money. Therefore, of course, betting strategies can be combined and specified. "Wrapped staked tokens" such as stETH , xKNC, and xAAVE can be traded on secondary markets and provide risk, management participation, and/or node verification to a third party. Staking rewards are then split between the investors holding the wrapped staked tokens and the creator of those tokens. Another approach is to combine two or more protocol staking strategies to achieve several goals. For example, when you stake Aave Balancer pool shares, you are rewarded in BAL and AAVE.

 

How Is Staking Different from Yield Farming?

Staking is a gateway to more complex Defi investment strategies such as yield farming. However, it has a few important differences. Yield farming is an iterative investment strategy that uses lending, borrowing, and liquidity stakes to maximize profits with earned interest and governance token rewards.

 

Staking is a much safer passive investment strategy because it does not involve any borrowing at high-risk interest rates or collateral rates. When you stake your assets, they are locked in a smart contract and your only risk is the security of the tokens or the protocol itself.

 

How Are Staking Rewards Calculated?

There is no short answer to this. Each blockchain network may use a different way to calculate staking rewards. Some are set per block and take into account many different factors. These factors may include:

  • How many coins the validator has staked?
  • How long the validator has been actively staking?
  • How many coins are staked in total in the network?
  • Inflation rate
  • Other factors

 

In some other networks, staking rewards are set as a fixed percentage. These rewards are distributed to validators to compensate for inflation. Inflation drives users to spend rather than holding coins, which increases the use of coins as cryptocurrencies. However, in this model, validators can pre-calculate how much staking reward they can receive.

Some people may prefer a predictable reward structure instead of a probabilistic block reward structure. And since this information is public, it can encourage more participants to stake.

 

Frequently Asked Questions About Staking

 

1-) How Does One Stake? Are There Any Requirements?

Once the authorized DAO is live on the Ethereum main net, all API3 token holders will be able to pool their tokens and stake them. This will give you voting power and weekly stake rewards that you can actively use or transfer to another user. You don't need to claim these rewards weekly or actively re-bet. You will get them automatically and they will merge automatically.

 

2-) How Much Does Staking Pay?

For both staking purposes, the DAO will seek a certain level of participation (target a certain percentage of the total API3 supply to be staked). The staking reward strives for the total staked amount to reach balance at the target. In other words, the stake reward will increase when the staked amount is below the target and vice versa. It will not have a predetermined schedule.

 

3-) How Exactly Does It Get Calculated?

The award amount is represented as the APR - annual percentage rate. You can also get the APY - annual percentage return using an online calculator. Each week, stakers are paid roughly APR/52. We have a manageable “APR update step” with step size every week the APR will be updated. We also have manageable minimum and maximum APR values, but these exist specifically as maximum APR security measures and should not affect rewards in day-to-day operation. In general, managing the share target will be the primary tool for regulating rewards.

Like a trifle, this variable bet reward scheme is often attributed to Livepeer. We originally planned to organize the rewards using a PID controller, but later chose this simpler model because of its predictability and intelligibility.

 

4-) When Do I Receive My Awards?

Somehow, right away. This is because you will immediately start receiving voting power and earning rewards for them. On the other hand, you cannot withdraw your rewards for one year. Since the rewards are paid out every week, you can think of it as a perpetual unlock (the rewards you receive this week will be unlocked after 1 year, the rewards you will receive next week will be unlocked after 1 year and 1 week, etc.) This 1-year lock is the secret sauce of good decentralized governance, essentially aligns the incentives of stakeholders/managers with the DAO/project/token for an entire year.

 

5-) Why Are The Rewards Not Paid Block By Block?

In some betting schemes, rewards are paid block by block rather than periodically (i.e. every time a user interacts with the staking contract, it first triggers a reward payout). Although this has its advantages, we chose weekly rewards to be able to gas-efficiently implement the 1-year lock for rewards. Simply put, if we pay out rewards too often, it would be costly and expensive to look at these records to calculate how many rewards you received last year.

 

6-) Will I Get Slashed If There Is an Insurance Claim Pay-out?

No, because these insurance products have not yet been implemented. Once they are, an offer with a 50% quorum requirement will need to be accepted for them to be active, so you won't miss it.

 

7-) Can't I avoid insurance claim payments by simply removing it anyway?

We have implemented a delay mechanic to remove the slash where the user is exposed to a slash. If the user initiates an unstake in the event of a possible claim payment, the dispute will be resolved during this time and the user will still be penalized. No rewards are paid for tokens that are in the process of being removed, to prevent users from constantly launching risk-free activities as a way to sit on the fence. Initially, this delay will be 1 week but can be increased by a DAO vote as insurance products roll out.

 

An Important Note: The practical aspects of staking are pretty straightforward, which made this a short post. The longer you stake, the more coins you will be rewarded. However, you will need to make sure that the DAO is properly managed because you will only be able to get these tokens in a year. In the next post, we'll get into the ways stakers can manage.

 

Final Thoughts 

You can think of staking as a less resource-intensive alternative to mining. It involves holding funds in a cryptocurrency wallet to support the security and operations of a blockchain network. In a nutshell, staking means locking up cryptocurrencies to earn rewards. In today's article, we tried to give answers to all the questions about staking. We hope that this blog post will be beneficial for you. We will continue to create useful works in order to get inspired by everyone. We are sure that we will achieve splendid things altogether. Keep on following Finage for the best and more.


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