The many layers of crypto staking in the DeFi ecosystem

Staking has been used fluently to describe several actions within the world of crypto, from locking your tokens on a decentralized finance (DeFi) application or centralized exchange (CEX) to using tokens to run a validator node infrastructure on a proof-of-stake (PoS) network.

PoS is one of the most popular mechanisms that allows blockchains to validate transactions and it has become a credible consensus mechanism alternative to the original proof-of-work (PoW) used by Bitcoin.

Miners require a lot of computational power to carry out the energy-intensive PoW, while PoS requires staking coins as collateral to validate blocks and verify transactions, which is significantly more energy-efficient and presents less centralization risk. These are some of the reasons why companies like Mozilla changed their donation policies to only accept PoS crypto donations in line with its “climate commitments.”

The Ethereum protocol is expected to undergo a transition to a PoS consensus mechanism before the end of the year. On the roadmap to scale the network, the merge feels right around the corner. Ethereum miners will have to mine a different cryptocurrency or pivot to staking if they wish to continue securing the network.

Dogecoin also has plans to perform this transition in the future.

Staking rewards are incentives provided to blockchain participants for validating new blocks. There are several ways in which one can participate in staking within the crypto ecosystem:

Run your own validator node

Proof-of-stake allows for anyone with a computer to run a node and validate transactions by participating in the consensus of the selected blockchain. Validators are assigned at random to verify a block.

Validators have to build their own staking infrastructure to run a node. Depending on the network, being a validator can demand high entry costs as a set amount of tokens needs to be staked before going live.

As long as the validator node is live, the tokens being staked are both locked up and earning a yield. Running your own node can be complicated and technical for beginners and if done incorrectly, can incur financial losses of the tokens at stake.

Delegate to a validator

Tokens of PoS networks can be assigned to a third party so they can run their own node and validate transactions. This is a less complicated method than running your own node but involves delegators joining a staking pool and trusting the selected validator with their tokens.

Projects like Stake.fish offer “Staking as a Service” to ensure the legitimacy of these validators. The founder of Stake.fish’s validating services also co-founded f2pool, one of the largest Bitcoin and Ethereum mining pools.

Similarly to running a mining pool, a staking pool requires a robust team of engineers. The main difference comes down to the target audience. While mining pools are focused on miners, staking pools cater to anyone who holds PoS tokens. Dasom Song, head of marketing for Stake.fish, told Cointelegraph:

“Managing and building our own infrastructure is our way of contributing to the crypto ecosystem.We talk with projects, research ecosystems as well as listen to our community to make a decision on new chains to support.”

Both running your own node and delegating to a validator are some of the safest ways to earn an active return on your tokens but come at the cost of making your assets illiquid for a set period.

Liquid staking

In recent years, several projects have sprouted that offer token holders an alternative to staking pools and solve the illiquidity of staking while still contributing to validating the network.

Lido (LDO), the highest-ranked protocol by total value locked (TVL), supports several blockchains with their yield-bearing tokens like Ether (ETH), Cosmos (ATOM), Solana (SOL), Polkadot (DOT), Cardano (ADA) and more. It is a non-custodial protocol but it is not permissionless as the Lido…