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2022 Guide to Staking
2022 Guide to Staking
What is staking?
4/27/2022
Index Coop
What is Staking?
Holders of cryptocurrency and other digital assets are interested in profiting from their holdings without having to sell outright. That’s where staking comes in. Staking allows holders to earn a passive income off their digital assets.
Whether you are interested in staking your crypto assets yourself, or are simply looking to learn more about the decentralized finance (DeFi) space, this post will provide you with a basic overview of everything you need to know about staking.
What is Staking?
Staking is the process by which token holders put their digital assets to work while earning passive income. It enables token holders to utilize their assets without selling them. Staking is similar to owning a savings account with a traditional bank. The bank pays you interest because conventional banks use your money for things like loans and other investments. In a similar way, staking allows you to put your tokens to work.
Staking is only possible on blockchains that utilize proof of stake (PoS) as opposed to proof of work (PoW), as a method for validating new blocks. But more and more blockchains are opting for the PoS approach, because of environmental and economic concerns about the energy required for PoW. Ethereum, in particular, is expected to move to a fully PoS model sometime in the summer of 2022, in what is known as “the merge.”
In a PoS blockchain, a user's number of tokens staked is used to validate transactions. Users have a better chance of being selected to validate transactions on the network and earn a reward if they stake more tokens.
Depending on the protocol, there are some differences in how proof of stake systems work. Still, in general, the algorithm chooses blocks at random and sends them to a validator node for evaluation. The validator then verifies the validity of the transactions. If everything is correct, the validator enters the block into the ledger, once this process is completed correctly the validator earns the block rewards. A validator's staked holdings will be penalized if it adds a block with incorrect data.
Why should you stake?
There are three primary reasons you should stake tokens that you are not currently trading.
1. Passive Income
By staking tokens that are not actively being traded, you earn passive income through an annual percentage yield or various rewards depending on the protocol you stake your tokens with, so as a token holder, you can ensure that in addition to holding a token long term, the time spent holding the token can be used to create additional income. A token holder could earn annual percentage yields as high as 8.19% for BTC, 25.12% for dYdX, 6.49% for AAVE, 5.23% for BNB on Binance, and on Coinbase, you can earn 4.5% for ETH, 5% for ATOM, 4.63% for XTZ and 0.45% for XTZ
2. Low barriers to entry
Compared to a proof-of-work mechanism that requires a large amount of computing power and a large amount of energy, the proof of stake system does not require large amounts of energy. According to a report published in September 2021 by Digiconomist, the energy consumed invalidating a single Bitcoin transaction is equivalent to the energy utilized by an ordinary American home for 61.47 days.
3. Environmental Considerations
Staking is believed to be more environmentally sustainable, saving over 99 percent of energy consumption, according to Vitalik Buterin, one of the co-founders of Ethereum. Proof of work mechanisms, on the other hand, requires specialized mining hardware such as a GPU, which consumes a lot of electricity. Each Bitcoin transaction is projected to use around 2100 kilowatt-hours (kWh), roughly equivalent to what an ordinary US home spends in 75 days. Cryptocurrencies like Bitcoin can produce a lot of greenhouse gas emissions if the energy comes from non-renewable sources. Bitcoin's annual carbon footprint is comparable to the discharge of 97.2 megatonnes of carbon dioxide, almost equal to Argentina's yearly emissions.
How can you stake?
If you decide to stake your tokens, you can either be a validator on a proof of stake platform or stake your tokens on an exchange.
1. Purchase a proof-of-stake coin
Staking is not available in all cryptocurrencies.. You will need a cryptocurrency that uses proof of stake to validate transactions. For example, Ethereum (ETH) was the first cryptocurrency to have a programmable blockchain on which developers could build apps, other examples of proof of stake cryptocurrencies are: BNB, Tezos, Decentral Games (DG) etc. Ethereum began as a proof-of-work system, but it is now shifting to a proof-of-stake paradigm.
2. Stake your token on an exchange
There are a number of exchanges where you could stake your token, for example Binance is one of the top crypto staking platforms for individuals who want to earn high staking rewards. This well-known exchange platform can accommodate approximately 100 distinct staking coins, allowing for a diverse selection of projects and APYs. You could also stake your token on the following exchanges: Coinbase, eToro, Crypto.com, LooksRare and many more exchanges; however, it is important to do your research on an exchange before staking your tokens.
3. Buy the Interest Compounding ETH Index (icETH)
If you are looking for a simple way to access enhanced yield, without having to personally stake your assets, you might consider the Index Coop’s icETH product. icETH uses a leveraged liquid staking approach built on the Set Protocol. Within Aave v2, icETH uses Lido's liquid staked Ethereum token—stETH—as collateral and borrows ETH in a recursive manner to obtain more stETH. As a result, token holders get spot exposure to ETH and approximately twice the yield when compared to holding stETH alone.
This product is quite advanced when compared to basic staking processes, so make sure you have a thorough understanding of how it works before proceeding.
About Index Coop
Index Coop is a decentralized autonomous organization (DAO) that powers structured decentralized finance (DeFi) products and strategy tokens using smart contracts on the blockchain. We offer a suite of sector structured products, leverage and inverse products, and yield-generating products. We aim to create products that are simple to use, accessible to everyone and secure. Our products are built on Set Protocol, a twice-audited, self-custodial DeFi tool that allows for the creation and management of Ethereum-based (or ERC-20) tokens. Among users, partner protocols, and our composable products, Index Coop maintains one of the largest partnership networks in the DeFi ecosystem.
How to buy Index Coop products:
First, you’ll need to create an Ethereum wallet like Argent, Metamask, Gemini, or Rainbow.
Next, you’ll set up your new wallet and connect your bank account
Once you’ve deposited fiat currency in your wallet you can exchange it for ETH and purchase Index Coop products like the Interest-compounding ETH Index (icETH)
You can also earn or buy icETH tokens directly via your favorite decentralized exchange.
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FAQs
Index Coop yield tokens simplify earning yield in DeFi by automating complex strategies and diversifying across protocols. They are user-friendly and cost-efficient, appealing to both new and seasoned DeFi users.
Leverage tokens automate a leveraged position by utilizing onchain money markets like Aave or Morpho to borrow funds, amplifying a user's exposure to an asset without requiring manual management. The token's smart contracts autonomously handle the borrowing, lending, and rebalancing of assets, maintaining a consistent leverage ratio despite market fluctuations. This automation eliminates the complexities of collateral management and liquidation risks, while also charging low, transparent fees that avoid expensive funding rates often charged by perps.
Index Coop is a decentralized autonomous organization (DAO) that specializes in creating and maintaining onchain structured products. Index Coop aims to democratize access to the crypto market, empowering everyone to participate in the growing digital asset ecosystem with ease.
No, yield automatically compounds and accrues to the token price. The value of the tokens you hold in your wallet will simply go up over time without the need to claim or compound rewards.
Index Coop products protect you from liquidation with automated risk management that rebalances assets to maintain a target leverage ratio that avoids liquidation.
INDEX is the ERC-20 governance token on Ethereum for Index Coop. INDEX empowers its holders to participate in decision-making processes that shape the future of Index Coop.
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Streaming fees (an annual fee paid continuously block-by-block), mint and redeem fees (only on leverage tokens), and borrow costs (interest paid to borrow funds from onchain markets when using leverage).