Over the years, in exchange for fees, banks charge securities for funds and investments from clients. These fees could amount to reasonably significant figures if carefully tracked and recorded at the end of the year.
Banks promise traditional savings accounts owners interests if the account owners lock up funds in savings accounts for some time. The banks then use the funds to do business. From the process, they pay the participants compound interests based on annual percentage yields (APY).
The continuous innovation in the crypto and blockchain ecosystem birthed the proof-of-stake (PoS) consensus, and it has since offered a better investment crypto option for investors.
Investors require little or no fees to get started in staking. And with the introduction of new protocols, especially in the Ethereum blockchain and CeDeFi world, prices have become insignificant, and investment is now flexible and available to virtually anyone.
That said, will staking defeat the banking system in the future? The first step to answering this question is understanding what staking is all about and how it works.
What is Staking?
Staking means locking up cryptocurrencies in cold or digital wallets for validating crypto transactions to get interests or other rewards. As an alternative to the proof-of-work (Pow) consensus associated with Bitcoin transactions, developers in the blockchain ecosystem introduced the proof-of-stake protocol.
So, How Does Staking Work?
When users hold crypto assets in digital wallets, they are assigned nodes to signify their participation in the staking process. These nodes give them the rights to a certain amount of cryptos/stakes, which in return determines the amount of interest they earn.
PoS responds to the growing global concerns over how Bitcoin and some cryptocurrency transactions are validated, plus the amount of energy and electricity spent to confirm transactions.
To complete a single block of the transaction in PoW could take a considerable amount of resources, time, and effort. But in PoS, it is more uncomplicated and resourceful to both the blockchain network and investors.
New staking protocols keep emerging. The delegated proof-of-stake (DPoS) is a protocol that assigns voting powers to investors, and delegates are selected to be part of the validation process.
Another PoS protocol is multi-asset staking. In this form of staking, there are multiple reward options available to investors. Also, staking pools are common nowadays. In staking pools, investors combine funds to fuel the validation process and increase the interest volume.
How is Staking Reward Calculated?
The higher the amount staked, the bigger the interest. The interest rate is, however, the same for every coin holder. What differentiates investors is the worth of crypto assets they stake.
Blockchain networks may adopt different methods for calculating the percentage interest rates for their networks. Remember that staking occurs for some time, so it becomes easy for investors to predict the worth of rewards they could earn after this period using an APY.
Staking networks assign a minimum amount of coins that investors can stake. For the ETH 2.0 network, it is 32 ETH. For others, especially the BSC-backed networks, staking pools are adopted to accommodate as many investors as possible, but other criteria are put in place to ensure stability in the staking network.
Benefits of PoS over Banks
Holding funds in the bank is excellent, but PoS consensus has prospects for holders of crypto assets. Thanks to CeDeFi and proper DeFi auditing in the ecosystem, security is becoming stabilized as days go by. However, here are some of the benefits investors enjoy over the banking system.
- Active Participation: Investors in the PoS protocols can participate in the validation processes without throwing a single stone. Being involved means they actively push the blockchain ecosystem forward by just owning assets. The bank does not allow fund holders to participate in transaction processes, and ROI may not come as promised due to taxes and duties debited during accounting.
- Transparency: Transparency is another standpoint of staking networks that makes it easier for investors to know how their funds are used and calculate rewards and distribute them among other investors. Investors can predict their ROIs and easily budget how much they should lock up during staking. Banks do not give such privileges to investors. Investors can only take what they see, especially with the banks’ outrageous tax system and regulations.
- Multi-Asset Rewards: Staking platforms now offer multi-asset rewards, and investors can withdraw high-value or performing crypto assets. The multi-asset rewards system is popular with staking pools and DeFi exchanges, making it easier to reinvest crypto assets.
Staking or the Bank, Which is Better?
We’ve seen how profitable staking can be. Staking is synonymous with the traditional savings account system, but the only difference is the type of currency used. While staking requires cryptocurrencies, banking requires fiat currencies.
So, which one offers a better investment option? Let’s analyze their potential using the following parameters.
Fees are very minimal or not even available in staking. There may be little gas fees which may only apply when swapping crypto assets in exchanges. Moreover, you do not need to pay fees to get started in Staking, unlike in the banking system.
Fees apply to every sector in the banking system, from depositing to withdrawals to credit card fees and even maintenance. To a large extent, fees contribute to how banks generate revenue.
Before holders in the traditional savings accounts know it, the amount realized in interest becomes unrealistic and insignificant. For staking, it is different, and this is one place it tops over the bank.
There is more flexibility in banks than in staking protocols. While you can withdraw your funds anytime from your savings account, staking has protocols that restrict you to a time factor.
Investors must comply with unbinding time rules in staking before they can withdraw their crypto funds. Like in yield farming (another protocol that works just like the bank loan system), there are specified lock-up periods for all staking platforms.
Fees may apply to provide stability to the staking network and maximize benefits for both parties. There are no restrictions in banks; you can also find this in their terms of service. The bank tops over PoS consensus in the area of flexibility.
3. APYs and Profitability
Rates apply for the number of cryptos staked in a network or locked in a savings account. APY contrasts with APR because the former means that interests are compounded at the end of the year by the blockchain network to determine the percentage interests investors may earn at intervals known as APR.
Investors use APR to predict the outcome of the amount they may earn after staking or lending. APY applies to both savings accounts and staking.
For bank savings accounts, banks may offer APYs from 0.1% to as much as 0.70%. On staking networks, it is more significant. Investors may realize APYs of 1% to as much as 58%. There is a huge profit margin on comparing the two systems. Staking, generally, offers more ROI than banks give and is, therefore, more profitable than the latter.
Security means that users invest in a safe environment and funds are protected from external influence. In banks, investors’ funds are safer than in the staking networks.
Over the years, security has been a big issue for blockchain networks, especially those that run smart contracts. There have been several cases of vulnerabilities.
Banks may experience vulnerabilities, but it has several protocols to mitigate the effects. The bank may lose money, but the central bank always insures investors’ funds.
With the introduction of more robust protocols in the DeFi ecosystem, there is a considerable reduction in vulnerabilities, but that is not to say a convincing minimum. Developers can improve security in their dApps and networks through CeDeFi protocols, as seen in the Binance blockchain.
Security is another area banks have ousted staking, but with new blockchain protocols, issues like this are being tackled and resolved. Also, the introduction of cold staking, which requires locking crypto assets in physical wallets, reduces the possibility of investors losing their funds.
Regulation is another area the authorities are on the lookout for decentralized financial protocols. However, CeDeFi protocols will see an end to these regulations. Banks are regulated and fulfill legal rights to the authorities, unlike in the staking networks.
KYC is not customary with staking since confirmation is on the blockchain. The only regulation available in staking is in terms of holding coins. If assets get lost due to inadequate audited protocols from the staking network, investors may lose funds because of the lack of oversight systems in the ecosystem.
Staking Solutions and the Future of PoS Consensus
Seeing the potential in staking and the growth rate in the commercialization of decentralized finance, it is evident that staking is steering towards ousting traditional bank savings accounting systems. It offers a more compact, profitable and comprehensive investment plan.
The introduction of ETH 2.0 and BSC CeDeFi protocol have seen staking grow considerably in the crypto community by over 5%. An exclusive report by CoinDesk has also shown that banks plan to adopt the PoS protocol of ETH 2.0 to offer more low-risk, secure and profitable investment for asset holders.
This move by the bank says more about the future of staking. Furthermore, developers can build more intuitive platforms because these blockchain networks will provide a more comfortable and relatable environment for the crypto community and holders to stake their assets.
One of such existing platforms is Yefi.one. It has been audited by Beosin, one of the most trusted auditing firms, and ascertained to provide a secure environment for investors' funds.
The platform's governance cross-chain token, YEFI, grows at a 6x rate each month, having amounted to $45 since launch. Its value is predicted to double when the platform launches its NFT protocol allowing investors to have a broadband investment plan.
Now, this is a typical example of what most cryptocurrencies offer—profitability. Well, you won't have to rule out the probability of losses. However, the onus falls on the fact that the realizable APYs from crypto staking far outweigh what banks can dream of; and it only gets better.
Staking and locking up funds in the bank to earn interests can be a form of investment, but there are limitations to both. For banks, it is the outrageous fees and the value-added taxes charged due to regulations from the authority.
For DeFi, it could be regulatory and security concerns. However, DeFi proves to have a more significant edge over the bank, and with developing protocols coming into the blockchain ecosystem, staking is here to stay.