Misconceptions about Staking: Protocol Staking vs Liquidity & Lending

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The term “staking” has evolved in crypto to encompass a lot of meaning. Recently it came to our surprise that even people who work in the crypto industry sometimes confuse what it actually means. The confusion is understandable of course, the term is now used to convey a wide range of financial use cases.

The origin of  “Proof of Stake”

Proof of Stake (POS) was created as an alternative to Proof of Work (POW), the original consensus algorithm used by Bitcoin. Proof of Stake requires users to stake their tokens to validators or nodes which carry out the vital functions of the network; they validate transactions, store records, or participate in governance by submitting votes.

Infrastructure validators like Figment are responsible for checking the validity of transactions and maintaining the sustainability of several blockchain networks. The added benefit of Proof of Stake is it does not require extensive hardware, it reduces energy usage by 99.95% compared to Proof of WorK. 

Proof of Stake is also the backbone of a new economy of smart contracts and decentralized finance (DeFi). By supporting our base layer protocols you get the benefit of industry innovations being built on chain. This landscape has grown from $1 Billion to $80 Billion within the last year alone, and is estimated to grow to $800 Billion by 2022.  

What is Protocol Staking?

Protocol staking is a way to earn passive yield by securing tokens on a Proof of Stake network. Protocol staking is a more conservative and reliable way to gain returns compared to liquidity and lending. 

Tokens can be staked, or locked into a protocol in exchange for the chance to produce a block, which in turn you receive a reward for. Locking your tokens is essential for the operation, security, scalability, and decentralization of the protocol. Staking your tokens allows you to earn new issuance (also known as inflation) subsidies, and fees generated from the network. 

Types of Staking (Lending, AMMs, DeFi, and more)

Here are a couple common definitions of staking:

  • Protocol Staking: True to the original definition, protocol staking is the core concept of “Proof of Stake” the base layer of how protocols function.
  • Lend Staking: Lending platforms can be both centralized and decentralized, similar to a bank where they will lend out your tokens for a return.
  • Liquidity Staking: Many automated market maker (AMM) platforms allow users to provide their tokens as liquidity and in return receive rewards.

Lending platforms like Aave are decentralized and offer users a non-custodial way to participate (stake) as depositors or borrowers, in other words you still control the keys to your assets. Centralized lending platforms like Celsuis on the other hand offer a similar depositor and borrower reward structure, but they own the keys to your assets.

Staking even includes services like  automated market maker protocols such as Uniswap, Sushiswap, and Curve. Within these AMMs, users can stake or lock tokens to provide liquidity to trading pairs, and in return, earn trading fees on the platform. 

Another way to earn passive income staking tokens is yield farming. Yield farming is a complex strategy where users move their assets around between different high-yield marketplaces and staking protocols to attempt to maximize their returns. 

Comparison of Staking Risk

Unlike some of the examples above Figment only supports protocol staking. As mentioned, Protocol Staking happens at the base layer of the blockchain, it is essential for the sustainability of the network. As you can see in the table below it’s a much less riskier option for your financial well-being with the added benefit of governance, after all it’s important to note with Proof of Stake you have a say in how the protocol operates.

Staking with Figment

Figment reduces protocol staking risk by decreasing slashing risk to zero with our multi-redundant insured validator network, we are also a non-custodial service, meaning you can own and manage your own keys. 

Our platform offers staking, middleware, and application layer solutions for token holders and developers investing in and building on Web 3 technologies. We are on a journey to build a better Internet, keeping privacy, data ownership, transparency, decentralization, and censorship resistance top of mind.

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