INTRODUCING STAKING: THE EVOLUTION OF SAVINGS ACCOUNT WITH DECENTRALIZED FINANCE “DeFi”
The advent of blockchain technology cleared the path for the invention of other technologies based on the blockchain model. This technology has proven to be disruptive in virtually every day-to-day activity of life. This is especially prominent in the financial industry.
According to Banking Exchange (2020) , Decentralized finance (commonly known as “DeFi”) has grown from a blockchain-based FinTech sandbox into a complex array of platforms through which borrowers, lenders and investors can undertake bank-like transactions without banks.
The emergence of blockchain technology has given room to the revolution in the financial systems. DeFi, a growing movement in the financial world, actually makes it possible for normal day-to-day financial activities such as borrowing, lending, savings, payment for goods and services, exchange of assets among others to run on the blockchain without any central parties. This means you are in total control of your funds and finances. DeFi doesn’t require your information or any other paperwork, a device connected to the internet is all you need.
With the click of some buttons you can earn interest on your funds right away. Could that be more innovative? It is just like locking your money in a bank savings account, but without the exorbitant charges, long processing time, unnecessary paperwork and breach of your private information.
This model is known as “STAKING”. Staking simply means locking your funds to get daily interest on it. It is just like depositing funds into a savings account and watching the money grow.
Staking is a profit generating model in DeFi which aims to give you profits without the funds actually leaving your custody.
HOW STAKING WORKS
Although you can easily stake your coins with the push of some buttons, but behind the scenes, other things are going on.
The coins are deposited into a staking pool, which contains other stakers’ coins, and that is the reason for the name “pool”. The coins in the pool are constantly being used by the protocol to generate interest for the stakers.
Every staking protocol has their set rules of operation. These include:
- Staking period, which is the minimum duration your staked coins can be in the pool before you can withdraw them. This is usually in days, and is put in place to protect the pool from malicious actors.
- Withdrawal fee, which is a little percentage of your interest paid to the staking pool. This is for maintenance and development of the pool’s infrastructure.
- Deposit limits, which are the minimum and maximum amount of coins a single user can stake. This is to protect the pool from “monopoly of operation”. Most staking pools run their operations based on Decentralized Autonomous Organization, DAO, also known as Decentralized Governance, where the users (stakers) vote to choose the kind of operations and rules they want for the pool. Here, the voting power of an individual is dependent on the amount of coins he/she has in the pool. These deposit limits are in place to ensure that a single person or few people doesn’t have all the power to the operations of the pool.
- End-Of-Stake penalty, is the fee paid to the pool if you want to terminate your staking contract before the end of the staking period. This applies to some pools, while it doesn’t to others.
HOW INTERESTS ARE PAID
Most staking pools have their own native coins. These coins can be staked in some pools, while some pools only pay out interests with their native coins.
Many pools pay out the interest by considering the actual quantity of your staked coins. Some pay with coins that are pegged to fiat currency values. These pegged coins are known as stablecoins. These stablecoins can be exchanged on the staking platform for the native coins or other cryptocurrencies. You can also exchange these stablecoins on other supported exchanges.
The interest percentage you get on your deposited coins is determined by the rules set on the staking pool. Individual
staking pool has formulas for calculating their interests. The interest on some pools are constant, and varies on others.
The payout rules depend on the rule of operation of the pool and usually most of these rules are voted for by the users on the staking pools with DAO functionality. These differing rules are evident with some pools paying out daily, some weekly and even some monthly.
HOW INTERESTS ARE GENERATED
Staking pools generate and pay out interest in different ways. Basically, the pools use the staked coins to generate the interests.
Some of the ways interests are generated include:
- Using the coins in the pool to run nodes. Blockchain protocols using Proof-Of-Stake consensus rely on the staked coins to secure their blockchain. These staked coins are used to verify and confirm transactions on their blockchain. In so doing, fees are generated and paid to the nodes in form of miners’ fee, for securing the blockchain. Staking pools use the staked coins to run nodes, or contribute to larger nodes, thereby generating profits for the pools, and consequently for you, the staker.
- Staking pools also lend out the staked coins to borrowers, and the borrowers repay the loan with interests. These interests are paid out to the stakers with respect to the predefined rule of operation of the staking pool. The loans are secured by collaterals that the borrowers deposit on the staking platform. Most times, the collaterals are usually higher in fiat value than the borrowed funds.
- Liquidity Pool is another way for the staking pools to generate interests. With the ever-growing interest in DeFi, Decentralized Exchanges’ transaction volume keep soaring, due to the transparency, security and integrity of DEX(s). The operations of decentralized exchanges heavily rely on liquidity provided by the liquidity providers (LP).
Liquidity providers deposit coins to the DEX smart contracts. And every transaction done on the pair deposited attract certain percentage of profit to the LP. Staking pools provide liquidity in DEX, to get profits, which are shared to the stakers as interests.
- Different staking platforms with their native coins devise other ways to generate interest for the stakers. An example is deducting a minimal percentage of coins from every transaction carried out with their native coins. This is returned back to the pool to serve as interest for the stakers.
This means, most staking platforms have their coin-flow mechanism to keep their pools active.
Unlike in traditional finance, where the bankers and other financial institutions control the financial activities, and people’s funds are in their total control, DeFi proffers solutions to the authoritarianism and insecurities that the traditional finance poses. This is done by giving the users the power to vote for the operations they want, while having total control of their funds.
Interested in a platform that offers a user-intuitive interface, and inclusive decentralized autonomous organization, where you are sure to be in total control of your finances?
Delfy is a DeFi protocol built to serve you in all aspects of your finances in a decentralized method. An ecosystem that comprises protocols running on sophisticated smart contracts to serve all aspects of your financing, it removes the hurdles hindering you from effective and efficient usage of decentralized finance.
Delfy offerings include but are not limited to:
- Delfy Farming and Staking, where you can stake tokens and LP tokens to generate income with the best APY.
- Delfy Swap, a decentralized exchange where you can swap your tokens easily, even without being a tech or blockchain savvy.
- Delfy Lending and Borrowing, giving you a platform where you can borrow and/or lend your tokens, while generating income. Whether you’re borrowing or lending, you generate interest.
Delfy also offers more products that are in development. Learn more on the official website here.