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Whether you’re an early crypto user or just getting to grips with it, you’ve probably heard of staking by now. This blockchain phenomenon, now with $ 59 billion in locked funds, is designed to recreate the way traditional financial institutions make money. For laypeople, this means that DeFi enables the public to participate in the financial markets by providing liquidity, borrowing and lending. And since we’re talking about blockchain, DeFi is of course only limited to crypto.

But how do you get started in this complicated world of decentralized finance?

If you’re asking yourself the same question, consider this post a gentle introduction to staking and a glimpse into the key factors that put certain entities and tokens at the top of the industry rankings.

Stake out 101

By definition, staking means interest for “lending your money”. However, compared to traditional retail banking, where institutions lend funds to individuals and companies, crypto staking replicates the financial market itself. On this side of the fence, the public has the opportunity to earn rewards from lending or providing liquidity to crypto institutions , also known as the apps where market trades take place. Such media are primarily the decentralized exchanges, which not only attract high trading volumes ($ 10 billion per week in the case of Uniswap) but also the need for constant liquidity to function properly. Think of Uniswap, PancakeSwap and SushiSwap. Delicious.

Each DEX and DeFi token app resembles an ecosystem, each with its own vision for the future, interest paid to liquidity providers and governance mechanisms. The decentralized nature of this by any logical measure Giants, points out that once inside, your voice becomes an integral part of the ecosystem. It’s like securing a seat at JPMorgan’s board meeting – IPossible in the world of conventional banking, but a reality in the crypto markets.

The token pairs

The final differentiating function that differentiates current DEXs from traditional crypto exchanges like Coinbase and Kraken is that it is not people trading against each other, but a market maker. This market-making algorithm is subject to a fixed formula that dictates how the price of a token pair is calculated. In the case of Uniswap, for example, the price of the pair of assets is derived by multiplying the amount of each token in the pair and that number equals a fixed constant.

Trading token pairs, lending and borrowing is what all decentralized exchanges and DApps operate and how they earn fees. These fees are then distributed fairly among the liquidity providers of the token pairs. For this reason, choosing the right token is of great importance for the future of your fund. To be honest, it gets a little more complicated here, because DeFi is home to an amazing variety of tokens. Additionally, DEXs are designed to work with as many tokens as possible and take this idea even further by allowing users to exchange between indirect pairs – Just like Bancor in the early days. So if you need to buy EOS with XRT but such a pair doesn’t exist on Coinbase, a DEX will fix this for you with its paired smart contract and even allow you to add liquidity to such a pair.

As a liquidity provider, you need to decide which tokens or pairs of tokens to devote your money to, but luckily there are a few key pillars to look out for.

safety

The best tokens are those that are backed by real value collateral. As an example, Wise is supported by a blocked pool of ETH and BNB. The latter, as we know, is limited to the offer. So regardless of which direction the market is headed, your funds will always be backed by an asset that is critical to the industry. Then there are tokens like Aave. While the $ 10 billion liquidity pool is backed by its native token, it also proves that the ecosystem won’t fail the next time you wake up.

The info

It is always worthwhile to find out about the project or the token before funds are allocated for it. Yes, DeFi projects usually come with a fleet of B747s packed with technical documentation, but understanding the basics is a must. Sometimes you overwhelm projects with information in the Indian Ocean just to hide the otherwise obvious drawbacks of the ecosystem in question. Take a look at Maker’s website for best practice. It’s clear and easy to digest, and contains pretty much everything you will need.

Community and Governance

An active community is another great show of a character doing their job right. Similarly, control of what happens within the ecosystem often becomes a dealmaker for the token’s future when it comes to governance. The same applies to the loyalty of the community, expressed in the amount of the value associated with staking. As an example, DeFi projects like Synthetix report sums of nearly $ 2 billion devoted to the project by its supporters.

last words

DeFi may seem overwhelming at first, but continuing with a head start in mind, it’s best to start early. Furthermore, judging by the pace of development in the industry, staking will only serve as the basis for other innovative financial products that are becoming more and more complicated every day in the race for higher returns.

Diana King is a PR and communications specialist for crypto and tech projects, a journalist and a producer.

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Disclaimer: Opinions expressed on The Daily Hodl are not investment advice. Investors should do their due diligence before making high-risk investments in bitcoin, cryptocurrency, or digital assets. Please note that your transfers and trades are made at your own risk and that you are responsible for any losses. The Daily Hodl does not recommend buying or selling any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.

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