DeFi 101 and Staking
Are you familiar with banking, insurance, loan and credit, savings, fintech, financial trading, etc? They are generally referred to as “financial products”. If you are familiar with these, just think of DeFi (Decentralized Finance) as financial products built on the blockchain. Both TradFi (Traditional Finance) and DeFi are similarly structured, however, DeFi is decentralized and eliminates the need for financial intermediaries while TradFi is designed with trusted third parties in place, usually a financial institution.
DeFi is a collective term for financial products and services that are accessible to anyone with access to public blockchains and the internet. The aim of DeFi is to create an entirely new financial system, completely independent of the TradFi economy.
DeFi Staking
Staking is holding coins in a wallet to support the operations and security of a blockchain network. It is the act of locking cryptocurrency to receive rewards. I should mention that DeFi staking uses the Proof of Stake mechanism, where Validators are selected based on the number of coins they are staking.
Instead of buying and holding your crypto tokens and only make gains from the upward trend in market movement, you should consider staking on a DeFi platform for token rewards.
Let us practice with a pseudo example.
Let’s say you are a believer of the Cosmos ecosystem and you decide to stake the native token - ATOM, to support the ecosystem. In June 2022, you buy 100 ATOMs at $1 each totaling $100, with an APY of 50%. By May 2023, you expect to get 50% of 100 ATOMs which is 50 ATOMs as your reward, making the total of ATOMs you have 150 tokens .
If the market price of Atom moves upward from $1 to $3, by May 2023 you have your 150 ATOMs worth $450 (150 ATOMs x $3). Remember that your initial investment is $100 and you have made extra $350 profit. This could also happen the other way around when the value of the token moves downward.
Please, watch Finsmart’s Youtube Videos on DeFi and Staking using the links below:
Writer: Adesegun Sunmola