The growth of the revolutionary technology of Decentralised Finance (DeFi) has reached heights this year. Several DeFi protocols have created new records this year for instance DeFi protocols like Compound and Kyber have become the centre of attraction of the crypto industry. However, particularly the lending and staking sectors have contributed immensely to the DeFi growth. So what is Staking? Staking is referred to as the locking up of the assets (or tokens). By this active participation, users are generally incentivised with Staking rewards. DeFi Staking and lending services can seem to be lucrative. This is because some of the platforms provide competitive yearly returns. At times of price inflation, an yearly return of even 5% seems attractive.
What is the Paradox Related to DeFi Staking?
However, there’s a certain contradiction related to DeFi Staking. Generally, an interest is gained on debt (in this Staking) because the investment that is done is supposed to generate returns. And then, both the principal amount and the interest is both returned. But currently, as the pandemic situation furthers, the average interest rate in the real economy is almost down to zero. But surprisingly, the DeFi lending services still offer a 5-10% interest rate.
What Makes it Possible?
This is because crypto assets are not subject to any centralised authority or institution i.e., they are decentralized. Hence their price solely depends on their demand in the cryptocurrency exchanges. Unlike traditional assets, cryptos do not have any existing cash supply, therefore holding the assets is the only way in which the price of the tokens can be increased. Throughout the 2020 season of crypto, one thing has been permanent that is Hodling (used for people who hold assets rather than selling it) of assets. This is what makes staking relevant because it allows investors to hold the assets.
Staking is a Concept Similar to the Equity Loop
The staking that is done in BTC can be again used to buy other products. This concept is quite similar to the companies which accept cheap debts and then use it for purchasing their own equities. The debt then controls the equity and the equity loop continues. Consequently, the interest smoothens the volatility of the equity assets. However, staking on DeFi doesn’t work on several instances. Crypto assets don’t always go up and to some extent is a subject to luck.
