The cryptoeconomy is changing how you can earn on your savings
Staking cryptocurrencies is an emerging savings option for those looking to invest safely. The cryptoeconomy is growing fast. It needs money and liquidity for the many blockchain projects it supports. Messari currently lists over 1600 cryptocurrency tokens. Since many are not as well known or as popular as Bitcoin or Ethereum, these projects need money to help them grow.
There are two major parts of the cryptoeconomy that need staking: Proof of Stake blockchains and DeFi (decentralized finance apps).
Mainstream finance is starting to notice too. Forbes reports that JP Morgan issued a paper on staking saying this could become a $40 billion per year industry and it’s already $9 billion now.
Interest Rates Declining in Europe and the US
Staking pays much better rates than banks do. According to Bankrate, here are some leading bank interest rates. These interest rates don’t even keep up with inflation.
And why are these rates so low? Because central bank interest rates from the US, EU and the UK are incredibly low. Here are some leading central bank rates.
|Benchmark Rate||Country||Interest Rate|
|Fed Funds Rate||US||0.25%|
|3 month LIBOR||UK||0.14%|
Right now, the European Central Bank (ECB) deposit rate is negative while its lending rate is its lowest ever.
If lending rates are this low, then deposit and savings rates have to be even lower for a bank to profit by lending out your deposits. Lending out your deposits is one of the ways banks make money.
But if you are wanting a better savings option for your capital, staking might be the answer.
Staking: The Cryptoeconomy Savings Account and More
When you stake a cryptocurrency that runs a Proof of Stake (POS) blockchain, you are depositing that cryptocurrency to earn interest on your coins. Let’s use Solana as an example as it’s one of the top staking options listed on our Staking Rewards site.
Benefits for Solana When You Stake
When you stake, you are doing the following that helps support that network:
- You are buying the token, in this case, Solana (SOL)
- You are holding and not trading the SOL. This is good for maintaining a stable price for the token
- You are providing security for the network. The more people that stake, the harder the network is to attack
- You are verifying transactions. Your SOL is an active part of the network
Benefits for You When You Stake SOL or Other Tokens
When you stake, you earn the following:
- Interest on your SOL as part of the fees generated for verifying transactions and helping keep the network secure. At the time of writing SOL is paying 6.69% if you delegate your coins and 7.42% if you run a validator (please check our site for the latest SOL rates). These rates are more than 12x the bank interest rates above.
- You get to vote on proposals to change or improve the project. Only stakers and token holders get a vote in POS blockchains. If you have confidence in the project, then the idea of voting on proposals is a good active way to protect your investment.
- If the token increases in value, then you are earning both growth and income from your stake
Liquidity Pool Investing: Staking for DeFi
DeFi is the fastest-growing sector of the cryptoeconomy. And DeFi needs coin investments too.
Thanks to the decentralized part of DeFi. Algorithms and computer programs do the tasks of market-making and exchange firms in legacy finance. In DeFi, these businesses don’t exist.
A DEX (decentralized exchange) is an exchange with no middleman or centralized business behind it. A DEX needs a supply of coins so buyers and sellers can trade.
With DeFi, you invest in a liquidity pool that exists on the app in one of many combinations of cryptocurrencies. In DeFi, liquidity pools supply the coins that a market maker would in legacy finance. And now those fees that market makers and trading firms used to earn are what you can earn by liquidity pool investing on an app like PancakeSwap. You are also helping DeFi perform its two primary functions: Trading and Lending/Borrowing.
Why DeFi Yields Are Higher
On Pancake Swap, staking the CAKE token and stablecoin USDT pays much more (9x) than staking SOL above
The reason you are getting paid more to stake your cryptocurrency with a DeFi app is due to a combination of factors:
- Supply and demand issues, calculated by an algorithm since there is no centralized business doing it
- Traders who use leverage to trade in smaller coins pay high-interest rates to borrow
- The coin that you receive your payments can and will fluctuate affecting your returns so higher interest rates are offered to reflect this
Note that rates for POS staking are low because the risk is low. Rates for liquidity pool investing in DeFi are higher because there are more risks like token fluctuations or liquidity.