The term staking in crypto refers to a process in which a cryptocurrency owner locks up his coins in exchange for rewards. By staking cryptocurrencies, users gain passive income, usually expressed as an APR or APY percentage. APRs (annual percentage rate) and APY (annual percentage yield) are anticipated earnings listed as percentages.
This post will discuss staking, its history, its use in decentralized finance (DeFi), and the rise of liquid staking derivatives.
Staking is a way of earning rewards for holding cryptocurrencies. It is a common practice in proof-of-stake (PoS) blockchains, which are secure, decentralized networks that confirm transactions without the need for energy-intensive mining.
By staking their coins, users are verifying blocks of transactions on the blockchain and are rewarded for doing so. Staking rewards are typically paid out in the form of new coins or a portion of transaction fees. It's important to note that staking does not require users to give up any of their coins, as they will receive the same amount of coins back (plus the rewards) after the staking process is complete. This makes staking an attractive option for those looking to earn passive income on their cryptocurrency holdings.
Crypto staking is done by locking up coins or tokens to a specific address and then receiving rewards in the form of newly minted coins or tokens. These rewards are typically earned over a certain period and are proportional to how much is staked. This process not only rewards holders with additional assets but also helps secure the network and ensures the integrity of the blockchain.
Crypto staking is a concept that has been around since the early days of cryptocurrency. The first cryptocurrency to launch the concept was Peercoin in 2012. Peercoin was the first cryptocurrency based on a Proof-of-Stake (PoS) algorithm, while most others at the time were based on Proof-of-Work (PoW).
PoS and PoW are different methods used within blockchain networks to confirm transactions and secure the network.
PoW is a consensus algorithm used to validate transactions and secure the network. It requires significant computing power and is based on miners competing to solve complex mathematical puzzles.
PoS, on the other hand, is a consensus algorithm that does not require much computing power. Instead, users stake or lock up their coins to validate transactions and secure the network. As an incentive, those who stake coins receive rewards in the form of new coins.
Since Peercoin’s launch in 2012, many other cryptocurrencies have adopted PoS as their consensus model. Notable PoS cryptocurrencies include Cardano, Algorand, and Fantom. Recently Ethereum, the world’s second most popular cryptocurrency, transitioned to a PoS mechanism in an event dubbed “the merge.”
Proof of stake (PoS) is a consensus algorithm used by many cryptocurrencies which allow users to validate transactions and create new blocks on the blockchain. This is an alternative to the more traditional proof-of-work (PoW) consensus algorithm which requires miners to complete complex mathematical puzzles in order to validate transactions and create new blocks.
PoS is more energy-efficient and secure than PoW, and it also encourages users to become active members of the network by “staking” their coins.
On January 31st, 2018, the cryptocurrency EOS was released to the public. EOS uses a different consensus algorithm called “Delegated Proof-of-Stake” or DPoS which offers faster and cheaper transactions. Critics of DPoS claim that the benefits, including scalability and transaction speed, come at the cost of centralization.
In PoS, instead of miners solving complex mathematical problems to validate transactions and add blocks to the blockchain, validators are selected based on the amount of stake they hold in the network. The more stake a validator holds, the higher their chances of being selected to validate transactions and add blocks to the blockchain.
In DPoS, token holders vote for delegates who will act as validators and validate transactions and add blocks to the blockchain on their behalf. The number of delegates is limited, making it a more centralized and faster consensus algorithm compared to PoS.
So, the main difference between PoS and DPoS is that in PoS, validators are selected based on the amount of stake they hold, while in DPoS, token holders vote for delegates who will act as validators.
Since EOS’ launch, several other cryptocurrencies have adopted DPoS as their consensus algorithm, including Solana, Tron, and Tezos.
Earning passive income on tokens based on the Ethereum network, such as ERC-20 tokens or other blockchains, is possible via Decentralized Finance or DeFi. The concept of DeFi became popular in 2019, and with it, token staking farms.
With token staking farms, users can stake tokens on a certain blockchain and earn rewards. The major difference is that the yield or rewards do not come from securing the blockchain network. Instead, the rewards tend to come from a token or crypto projects marketing budget.
Token staking farms usually lower a token’s circulating supply, which tends to reduce sell pressure. Stakers, on the other hand, earn more tokens without the need to trade actively.
Ethereum staking works by validating transactions and adding blocks to the blockchain.
Anyone can become a validator by staking 32 ETH to operate a node. The more nodes a validator has, the higher their chances of being selected to validate transactions and add blocks to the blockchain. If the validator acts maliciously or fails to perform their duties, they risk losing their collateral.
Once the validator has successfully validated transactions and added blocks to the blockchain, they earn rewards in the form of ETH. These rewards are proportional to the amount of ETH they hold in the network and are distributed to incentivize continued participation in the network.
Beyond holding a certain number of ETH, running a validator on Ethereum requires technical knowledge and a dedicated computer with 24/7 internet connectivity.
These strict restrictions gave rise to different ETH staking platforms and liquid eth staking derivatives.
In December 2020, Lido launched the first liquid ETH staking platform. Lido’s platform allows users to stake ETH with much looser requirements. What made Lido’s revolutionary is that it provided stakers with a token called STETH that represents their stake and rewards. STETH is pegged to the value of ETH and is tradable across various platforms.
Many other platforms began offering similar services, although Lido remains unrivaled. Currently, 25% of all ETH staked on Ethereum is done via Lido. Lido is the leading liquid staking derivative platform on the market, with the highest TVL or total value locked by far.
Lido’s dominance of the market is a worrying prospect. Having one major entity that has a significant influence on building blocks threatens Ethereum’s decentralization. As a result, many alternative platforms are in development.
APRs and APYs are two important concepts in the context of crypto staking. APR stands for Annual Percentage Rate, and it is the rate of return that is earned when staking a specific crypto asset over a 12-month period. APY stands for Annual Percentage Yield, the rate of return earned over that same period, including any additional compound interest that may be accrued. Knowing the APR and APY for each crypto asset is important for understanding the potential returns you can earn when staking them.
Staking in crypto is not haram, as cryptocurrencies are not classified as currency in the traditional sense; they are digital assets traded on online exchanges.
While some Islamic scholars have argued that the underlying principles of staking in crypto may be considered haram due to the high degree of speculation involved, most agree that it does not violate any of the principles of Islamic finance.
As long as an individual is not engaging in excessive speculation and is mindful of their risk appetite, staking in crypto should be permissible under Islamic finance rules.
Hord is developing a unique liquid ETH staking platform that offers the highest APRs, low fees, and a liquid token called hETH. hETH will represent a stakers original stake, combined with rewards, and will be tradable on DEXs. As such, Its value will not be pegged to ETH but is expected to be slightly higher than ETH.
Hord’s ETH staking platform will offer the highest APRs available on the market. The secret to Hord’s APRs is a combination of ETH staking rewards combined with MEV boosts auto-compounding and additional Hord rewards.
MEV, or Maximum Extractable Value, refers to the potential profits validators can gain via front-running. Front-running refers to prioritizing certain transactions in a block before others based on their fees.
Read more about Hord’s liquid ETH platform.
Website: Hord.fi/
Twitter: twitter.com/HordApp
Telegram: t.me/hord_app
Announcements: t.me/hordnews
Youtube: youtube.com/channel/UCOhzE0AKC1ZFElFqIxbFAmw
GitHub: github.com/hord
Reddit: reddit.com/r/HordApp/
