“Buy DeFi Tokens” & Collect “Profits”: Terrible Idea or Passive Income stream

The Proof-of-Stake (PoS) concept allows cryptocurrency holders to validate or mine block Tx, depending on the number of coins held by the user. The mining power is directly proportional to the number of coins held by the coin holder. On one hand PoS eliminates the use of Proof of Work (PoW), thereby decreasing the overall cost of mining & improving Tx speed; but on the other hand, miners holding larger percentages have larger “say” risking centralization. To eliminate the centralization issue Delegated PoS (dPoS) algorithm can be employed (Ex: EOS) but that’s a debate for another time.

The concept of Proof-of-Stake (PoS) is simple; users can mine or validate block Tx based on the number of coins the person holds and earn coins as rewards for validations. Hence, transactions are confirmed at a cheaper and faster speed compared to PoW, due to which ETH 2.0 is moving away from power-hungry PoW to a more scalable PoS network, quite soon.

PoW VS PoS

Let’s delve deeper into this subject and have a detailed outlook of the staking system.

Instead of just investing the power resources of the users’ for processing transactions, personal coins are staked in the form of insurance by transaction node operators. For valid transactions, individuals staking coins are credited with new coins as a reward, while malicious parties are fined and have to part with their staked coins. Keep the coins in your wallet or stake in a smart contract to earn rewards. — It’s that simple!!!

This process is similar to bank deposits where an account holder is rewarded with an interest amount over the period of deposit. However, unlike the banks, staking is done in a smart contract, that should ideally never lead to any kind of human interference.

What is a Staking system?

If you are one amongst those, who are planning to begin with staking and do not want to get to the root of this ‘difficult’ technology, you can consider it as a Proof of Stake (PoS) mechanism for all practical purpose. There is no need to delve deeper into the details of the staking, but simply use the cryptocurrency in a reputed staking pool, and earn rewards. For that, one needs to select an appropriate currency for staking, which is available via a staking pool or wallet to start earning. This is ideally suited for firm believers in HODLing.

Staking as an alternate source of income?

Although the concept of earning rewards for holding cryptocurrency sounds lucrative, but unfortunately, one has to negotiate the pitfalls ranging from faulty smart contracts to outright scams. In most of cases, the reward amount is less for staking in reputed names like Celsius Network, Tezos, Harubank, etc compared to obscure companies, promising dazzling gains, as more often than not the returns are too good to be true and it's an outright Scam.

Depending on the cryptocurrency price and basic demand-supply, staking rewards can lead to steady passive income. Everyone can agree unanimously that dollars earned for locking coins are easy money. For locking up their asset from weeks to up to even a year, users can earn percentages of their entire staking balance as a profit.

History & Evolution of Staking

Dash is probably known for being the first cryptocurrency, which introduced the staking mechanism followed by other popular coins, like Tezos (XTZ). Tezos uses the Liquid PoS algorithm. It is positioned in the form of a network protocol for a time-tested and safe smart contract system. Ethereum, which is the second most popular cryptocurrency globally, will soon switch to Proof of Stake (PoS) in Ethereum 2.0 version. So, the concept itself is not new.

Risks

Safety should be your foremost driving force and not greed for choosing any staking protocol or wallet.

Security

This is the most important way of identifying a good platform because it’s quintessential to understand the safety of your money before processing ahead. Check if the Wallet or Staking protocol has been audited by any reputed companies. Features like 2FA, levels of KYC, etc are all good indicators for genuineness.

Reputation

Reputation plays a major role in defining the brand of a company. Currently, most DeFi projects are clamoring to get the attention of the people without trying to build a community. Most such projects often turn out to be Scams, so be wary of such pump-n-dump schemes. Identify the core team behind any project before investing!

The trust factor always remains for those who prefer to rely on the services provided by third parties. Trusting unknown parties online always show higher risks as compared to conducting everything yourself.

Fees

Certain DeFi projects charge a “small fee” for every transaction that takes place; it includes deposit, withdrawal, and trading. Choose the platform providing maximum transparency.

The platform is trying very hard to mitigate all these risks for their users. By having audited smart contracts, complete transparency in the on-boarding process, and a strong team of experts running the project, it aims to provide everyone equality to use financial products without boundaries and censorship.

Final Thought:

Question Everything, A to Z before Investing

This is the reason behind writing a series of articles on DeFi. Don’t let some teenager on Twitter tell you which DeFi projects are hot to invest in. A lot of this financial freedom and banking the unbanked is really a utopian concept! You can actually have a stable profit if you understand the concept and the risks and not take blind decisions based on emotions or hype. Stay tuned to know further about the developments in DeFi projects!!!

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