Staking is a highly appealing and extremely popular endeavor in crypto circles. In a nutshell, it involves ‘locking’ digital assets into a blockchain network or protocol, an action which provides the latter with security and entitles the staker to rewards. To draw a comparison with the world of tradfi, it’s somewhat analogous to earning interest on savings held in a bank.
Sometimes known as yield farming, the staking market is huge, with tens of billions of dollars locked in networks like Ethereum via staking protocols such as Lido and StakeWise. Through yield farming in crypto, users can pursue a different means of revenue generation to trading or hodling, committing to the roadmap of their held asset by locking it in a staking contract and triggering rewards for doing so.
The Evolution of Staking
The evolution of staking has also seen the emergence of liquid staking, the differentiating feature of which is that users can stake while also retaining liquidity. Because liquid staking protocols dispense synthetic versions of staked tokens that can be deployed elsewhere to earn additional rewards, users can effectively ‘have their cake and eat it.’
Before diving headfirst into staking, there are a few questions worth asking. First, which asset should you stake? Which platform should you trust, and what is the promised APY on offer? To be sure, there are a huge range of options, eligible tokens, and quoted returns – so it pays to take one’s time before making any commitment.
It’s important to be aware that with many staking projects, the reward for locking up tokens is payment in the form of the project’s native currency. Thus, not only do you have to believe in the midterm future of the asset you stake, you must believe that the token you’re receiving as a reward won’t nosedive at any second.
The truth is, most popular altcoins engender fairly modest returns through staking in an effort to avoid inflation (<5% on average) while freighting users with the risk of a significant price drop – both on the front end (the collateral asset) and back end (the yield). Which is why far from pocketing handsome returns, plenty of stakers end up losing money.
Synthetic Dollar Protocols
The emergence of liquid staking isn’t the only sign of an evolving staking landscape, though. The arrival of synthetic dollar projects has also given yield chasers an attractive alternative to traditional staking protocols.
While yield chasing in crypto has typically been risk-on, these synthetic dollar projects are less subject to market volatility for a few reasons. First, they tend to offer a superior yield rate (>10% APY); secondly, they pay rewards in the form of a stablecoin that, naturally, holds the value of the US dollar. At the time of writing, synthetic dollars have a market cap of $11.8 billion.
In the case of Falcon Finance, you can actually deposit stablecoins to mint sUSDf, an overcollateralized synthetic dollar offering a base yield of 10.3%. In other words, you benefit from the inherent stability of your staked asset and the yield itself. Moreover, you have the flexibility of withdrawing your assets at any time or committing to a fixed term in exchange for a better rate.
Another synthetic dollar protocol, Ethena, has minted and redeemed over $18bn in supply, returning $450m+ in cash rewards to users without a single basis point of loss. The protocol’s delta-neutral synthetic dollar, USDe, also hit a $10 billion market cap in its first 500 days. Ethena refers to sUSDe, which is paid as yield, as ‘internet dollars.’
What Next?
While no-one knows what staking will look like in five or ten years’ time, for the time being the ability to earn a stable income stream from staking, without shouldering serious volatility risk, represents the single greatest advancement in the evolution of yield farming thus far.
Synthetic dollar protocols and their yield-bearing tokens offer a unique value proposition that appeals to both defi users and, increasingly, institutional investors eager to put their greenbacks to work in Web3.
As the wall between defi and tradfi continues to collapse, expect staking and synthetic dollars to play an important role in the future of digital finance.
Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.
