Staking is a term often used to describe the locking up of cryptocurrency as collateral to help secure a particular blockchain network or smart contract protocol.
Staking is also commonly used in reference to cryptocurrency deposits designated towards provisioning DeFi liquidity, accessing yield rewards, and obtaining governance rights.
Cryptocurrency staking involves locking up tokens in a network or protocol to earn rewards, with those tokens used to help provide key services for users.
Staking in DeFi
Staking is also a term commonly used in decentralized finance (DeFi) protocols. Instead of securing block production, DeFi staking often refers to locking up tokens within a protocol to achieve a specific goal or result. While “staking” in this context could be considered a misnomer for some use cases, it is a common phrase used throughout the industry.
Some uses of DeFi staking include:
- Protocol insurance — Decentralized lending protocols such as Aave use staked tokens as a liquidity backstop, where holders can lock up their AAVE tokens within the protocol’s Safety Module to provide an additional layer of security and insurance for depositors should a black swan event occur. Stakers then earn rewards from the protocol.
- Governance — Curve, a decentralized exchange (DEX), leverages staking as a way to align long-term incentives between liquidity providers and governance participants. CRV holders can “vote lock” their CRV to receive voting escrow CRV (veCRV), where the longer they lock for the more veCRV they receive. Vote locking enables holders to vote on governance proposals, influence the CRV yield earned within specific liquidity pools, and receive a portion of the protocol’s trading fees.
- Liquidity provision — Decentralized liquidity protocol Synthetix incorporates staking as a way to supply collateral for the creation of synthetic assets that track the price of an external asset and are collateralized by staked SNX. SNX stakers are incentivized to provide liquidity to the protocol through inflationary staking rewards and the distribution of trading fees earned through dApps such as Kwenta that use the Synthetix protocol.
- Token distribution — DeFi protocols such as Alchemix employ staking as a way to distribute tokens to the community and bootstrap liquidity in a decentralized ecosystem. ALCX tokens can be obtained by staking certain tokens in the Staking Pools contract.