How to DeFi

Stake

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What

Staking crypto essentially means locking it up for future rewards — much like a savings account. The complexity of staking one's crypto, as well as the risks and rewards can vary depending on the coin and the place where it is staked.Bitcoin's blockchain relies on a consensus mechanism called Proof of Work, where the validity of the network is maintained by having people use their computers for solving math problems, roughly speaking. Proof of Stake is an alternative consensus mechanism that aims to alleviate the computational burden from a blockchain network via having people put their coins on the line instead. PoS networks include Solana, Avalanche and ETH2.0, amongst others. Setting up a Proof of Stake client can be quite technical and does not fit in the scope of this explainer. However, staking in the broader sense has been widely utilized by DeFi apps for various purposes, in which case it is as easy as clicking a button and paying some fees; like a savings account in the bank, but more transparent!

Why

Concentrating on the DeFi context, staking is a way for people to "signal their trust/allegiance" to a protocol. Some apps require people to lock up their tokens to partake in governance about future changes to the protocol.

Risk

When you stake your coins, you generally lock them in a smart contract, or maybe in a staking pool service offered by some Centralized Exchanges. In either case, you temporarily give up custody of your coins; even if you can withdraw with the click of a button (and paying some fees), your staked funds could get drained if a vulnerability in the code is exploited.

Reward

DEXes often give their users extra rewards for locking up their LP tokens, in order to incentivise people to provide liquidity on their platform — like different banks competing for people to use their services, but more transparent!