With Bitcoin’s introduction back in 2009, the concept of a decentralized ledger facilitated by blockchains was brought to the mainstream. Then came the notion of DeFi- or decentralized finance, and with it came a host of applications that provide traditional financial products and services like lending and insurance with a decentralized twist.
Staking, swapping, and farming are all features of the advanced DeFi space in 2022, over a decade after the OG decentralized currency came out. What do these features entail, however? Just in case you are still curious about the terms, let’s find out their details in this post!
Burgeoning DeFi Concepts: What is Crypto Staking?
Let’s start with crypto staking- a term you must be getting to hear a lot now that the Ethereum protocol has shifted from a proof of work protocol to a proof of stake one. So now the Ethereum 2.0 blockchain allows you to participate in crypto staking to win the right to validate and add a new block to the Ethereum chain. However, what is this crypto staking?
In DeFi staking, you have to lock some native crypto tokens of a blockchain into a smart contract upon that same blockchain so as to earn a reward. It is kind of the decentralized equivalent of putting your money into a fixed deposit at a traditional bank. With the emergence of more and more DeFi applications and blockchains with new, exciting prospects, DeFi staking is currently one of the best and easiest ways of earning profits from crypto assets you’re already planning to hodl or are sitting idle.
The DeFi staking process consists of locking up your crypto into smart contracts on top of blockchains and protocols that run on a supporting algorithm. For every individual blockchain, there’s a minimum amount of native tokens you must stake to become a validator (i.e., a node who validates one block and adds it to the native chain). Take the reformed Ethereum blockchain for example, where you need to lock up at least 32 ETH to run for the validator position.
Now, this is not something many can afford- locking up even the minimum staking amount of a crypto can be quite expensive if you’re shooting for staking on a blockchain like Ethereum. In that case, you can still become a ‘delegator’ and delegate a portion of your holdings to a pool where many others are also putting in their holdings. These pooled together funds can be used by an Ethereum node to run for the validator position, and the rewards can then be equivalently distributed among all participants in said pool.
Such staking pools are offered by many crypto exchanges, or platforms with the sole purpose to help with staking. Make sure to do your research well before going for crypto staking with a particular blockchain project!
Burgeoning DeFi Concepts: What is Swapping?
Now we jump into the next term to be understood here- swapping. As the word suggests, DeFi swapping is just a method in the decentralized finance space for transferring virtual assets. So, a DeFi token swapping is a mechanism where investors can exchange their own tokens for other ones- the definition really is as simple as that.
DeFi swapping can obviously only be done through a DeFi protocol or a dApp. Decentralized crypto exchanges, unlike traditional centralized exchanges, usually use an AMM or automated market maker where the smart contract code allows for DeFi token swapping between users.
It’s to be noted that decentralized crypto exchanges are non-custodial, and they can only run on liquidity provided by users through a method known as liquidity mining or yield farming- exactly what we will discuss next. The swapping of tokens is overseen by smart contracts instead of any third party or authority figure. The decentralized exchange also does not partake in the direct exchange, and the whole process of DeFi swapping is automated so there’s very few possibilities of errors.
Burgeoning DeFi Concepts: What is Yield Farming?
Just farming or yield farming is the DeFi way of lending (or staking) your crypto holdings to a crypto exchange or lending and borrowing platform so as to earn passive income through rewards. The rewards may comprise exclusive LP (liquidity provider) tokens and a portion of the fees earned by the platform.
As you can gauge, this whole deal of yield farming is quite similar to the process of putting money into your savings bank account with a traditional financial institution and earning interest on your holdings, or even lending funds to a borrower on a fiat financial platform.
There are quite a few yield farming strategies used by seasoned farmers, such as the act of moving your crypto holdings around from one decentralized platform to another to maximize the returns you earn. Again, in the whole process of yield farming in the DeFi space, smart contracts are there instead of any human intermediaries to automate the process, introduce trustlessness, and promote decentralization.
What’s more, with DeFi yield farming, transaction costs are much lowered than any centralized platform, which gives users yet more benefits.
As we near the end of this blog post, we do hope all three DeFi terms are quite clear to you at this point. With the advances within the DeFi space, more and more utilities of DeFi applications are being introduced, along with more and better ways of earning passive income. We absolutely can’t wait to see what future upgrades the DeFi space brings to mainstream finance!
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Disclaimer: Cryptos are unregulated virtual assets, not a legal tender and subject to market risks. The views and opinions expressed in the article are those of the author(s) and don’t represent any investment advice or WazirX’s official position.
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