Decentralized finance (DeFi) has been one of the hottest crypto market themes of 2021, and it is showing no signs of cooling off. DeFi is a blockchain-based system for financial products and services that incorporates automated products known as smart contracts instead of relying on a third party like a bank, thereby disrupting financial services and making it more accessible to the unbanked and underbanked.
The DeFi market has total value locked (TVL), which reflects the value of funds deposited on DeFi protocols, of $307 billion including staking and borrowed coins at last check. The market has ballooned from approximately $18 billion at this time last year. Ethereum is the leading blockchain for DeFi projects, with $153 billion of TVL on the network. Other popular DeFi blockchains include Terra, Binance Smart Chain, Avalanche and Solana, to name a few.
DeFi has also paved the way for passive returns in an otherwise low-interest rate and volatile market environment across activities such as lending and borrowing, yield farming, staking, and more. As investors have fled traditional asset classes for greener pastures in DeFi, the related cryptocurrencies have skyrocketed in 2021, in some cases leaving even bitcoin in the dust, though they were coming from a lower base. While there is no crystal ball for 2022, there's no denying the demand. In this article, we'll focus on a popular DeFi activity known as staking among some of the leading coins.
Staking is a way to earmark, or quite literally lock up, crypto holdings for a period of time and earn rewards like interest for doing so. Staking is contributing to the process of creating new blocks on the blockchain, and the amount you earn is commensurate with the amount you stake. By staking, you are contributing to a project by helping to verify transactions on the blockchain via the proof-of-stake (PoS) consensus algorithm, which Ethereum is transitioning to. Staking generates passive income considering all you need to do is set it and forget it.
Staking has been known to deliver returns of as much as in the double-digit percentage range, though average returns can also be more modest. The reality will depend on which coins you choose to stake and the platform on which you do it. For example, cryptocurrency exchanges Coinbase and Kraken both offer staking for a number of coins but the rewards can vary somewhat. We'll get into this below. Also staking APYs aren't fixed and therefore will change depending on the network dynamics.
Keep in mind, there is always a possibility that a coin's value will increase, which will bolster your overall returns, but there is also a risk that the cryptocurrency could drop in value, which would cut into staking rewards. We'll focus on some of the leading coins that are headed into the new year with the wind in their sails.
To start, you must have the relevant crypto wallet and holdings, which as an option you can create on one of the aforementioned crypto exchanges. The list of staking cryptocurrencies is only growing, especially as gaming projects begin to enter the fray, giving players yet another potential income stream. Some of the popular staking coins include:
Ethereum: So far, tens of billions of dollars have poured into the Ethereum staking contract even though the cryptocurrency's transition to PoS is not yet complete. There is a 32 ETH minimum to become what's known as a full validator, and each coin is currently trading at about $3,600. Fortunately, you don't need nearly that much ETH to stake on crypto exchanges like Kraken, Binance and Coinbase, for example.
Regardless of where you stake Ethereum, make sure you are prepared to hold for the long haul because you can't access your passive income until the network has fully transitioned to Ethereum 2.0, the date for which remains a mystery. In the meantime, there are projects like Lido, which let users stake on networks like Ethereum and direct the staked ETH to other DeFi projects to compound the yield. The APR for Ethereum on Lido is 4.8%.
Terra: Terra, the symbol for which is LUNA, is another cryptocurrency that can be staked. LUNA is the native cryptocurrency on the Terra network, which is a blockchain network for payments and creating stablecoins that are pegged to fiat money like the U.S. dollar and South Korean won. The LUNA price recently attained a fresh all-time high of over $103 per coin, and the crypto market bulls are expecting big things in 2022.
For the year, LUNA has soared more than 12,000%, and according to Dan Morehead, who is at the helm of asset manager Pantera Capital, it has more runway for gains ahead. LUNA can be staked on the Terra Station, a crypto exchange like Binance, or through Lido, to name a few options.
Using Lido, the APR on LUNA is 8.1%. Let's say you stake 25 LUNA coins on Lido, which is worth about $2,238 at current prices. Your staking rewards would be about $15 and $180 for the month and year, respectively. Plus, if the LUNA price continues to rise, as Morehead predicts, the gains could potentially be even higher when you regain access to your coins. LUNA has also been known to deliver staking rewards of up to 12% annually.
Solana is a rival blockchain to Ethereum whose native cryptocurrency is also proof-of-stake. That means you can earn passive income by staking Solana for locking up your coins for a while. Solana is available to stake on exchanges like Kraken, Binance and FTX, wallets like Exodus, and more. On Kraken, you're looking at rewards of 6.5%.
Solana's role in DeFi has been on the rise, with TVL of more than $11 billion. Solana has been attracting projects to build thanks to the speed of the network, which can support up to 65,000 transactions per second vs. Ethereum's 15. Ethereum's upgrade to Eth 2.0 is designed to bolster that network.
The Solana cryptocurrency already had an impressive run in 2021, skyrocketing over 10,000%. Crypto exchange Kraken provided a bullish outlook in a recent report, saying that Solana could inch higher to the $600 level in 2022 if the technical stars align. The SOL price is currently hovering at $171.40.
Cryptocurrency prices are inherently volatile, and there's no way to predict exactly what will happen in 2022. If 2021 is any indication, however, DeFi could be the place to be yet again in the new year. As with any investment, be sure and do your own research (DYOR).
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