Simple Definition of Staking
- A process that involves committing your crypto assets to support a blockchain and confirming transactions
- Your crypto earns rewards while being staked over time
How does Staking work?
- If a cryptocurrency you own allows staking, this usually happens via a “staking pool” which you can think of as being similar to an interest-bearing savings account.
- The reason your crypto earns rewards while staked is because the blockchain puts it to work.
- Cryptocurrencies that allow staking use a “consensus mechanism” called Proof of Stake, which is the way they ensure that all transactions are verified and secured without a bank or payment processor in the middle. Your crypto, if you choose to stake it, becomes part of that process.
Yield Farming vs Staking vs Liquidity Mining
- Staking locks crypto for the network to function in return of fees
- Yield farming involves lending your money in return of interest through fees (like earning interest lending money to a bank)
- Liquidity Farming is when you provide crypto to liquidity pools and in return get Native/LP tokens + Governance Tokens
- Yield Farming is a subset of staking
- While yield farming supplies liquidity to a DeFi protocol in exchange for yield, staking can refer to actions like locking up 32 ETH to become a validator node on the Ethereum 2.0 network.
- Farmers actively seek out the maximum yield on their investments, switching between pools to enhance their returns.
- Liquidity Mining is a subset of Yield Farming
- The primary difference is that liquidity providers are compensated with the platform’s own coin in addition to fee revenue.
Where can I learn more about Staking?
I would look into this page I made on Proof-of-Stake to see what is Staking and why it exists