#CryptoExplained: Staking – A New Paradigm for Investment Income

Staking involves locking in crypto as a disincentive for malicious behavior. What does this mean? Imagine saying to someone, “I’ll give you 50 lakhs (60,000 USD) and if I misbehave you can deduct 1 lakh every time I misbehave. If I misbehave in a very catastrophic way, you can take the whole amount”. It’s very likely that you will not misbehave given these conditions, and that the other person will likely trust you with any action you take…as long as the action is valued at less than 50 lakhs. 

This in essence is the principle behind staking, and it’s a new way to earn returns. The returns fundamentally come from securing a decentralized network, since most of the participants performing actions on the network are anonymous. 

To understand this imagine trying to get 1000 anonymous people to not steal $100 lying on the ground. Let’s say they all stake 50 lakhs to be in the vicinity of the $100, and the same rules apply – if anyone steals the dollar, they lose 1 lakh. Chances are no one will steal the dollar because they will lose far more than they gain. So the $100 remains safe, even though there are 1000 anonymous people right next to it. 

You may be asking, why would anyone stake 50 lakhs in the first place. Well, Whoever needs the $100 kept safe pays the network a fee. This fee is distributed amongst the 1000 anonymous people. That’s the incentive to stake the 50 lakhs.

This is how staking in Ethereum works. Anonymous people stake ETH, consumers use the Ethereum network for DeFi, transactions, NFT’s, DAO’s, and pay a fee. The fee is given out as rewards to stakers.

On Ethereum the rewards are currently 4-8 % of the 32 ETH staked. This is currently lower than most interest rates, but when interest rates are low, this is very competitive. 

Staking is a new paradigm for returns to investors. If Ethereum were a traditional company, the returns would accrue to the company as profits (similar to Visa and Mastercard), and then the leadership would decide whether to pay out dividends. In this new paradigm however, rewards are paid out instantly so investors are not beholden to leadership. 

According to https://www.stakingrewards.com/ there’s almost $40Billion staked on Ethereum, and it is securing a network worth over $ 200 Billion, and much more in DeFi . Total rewards generated by Ethereum could amount to over $1.5 Billion per year depending on the price of ETH, and assuming a 4-8% return. 

And the global staking market is expanding thanks to new protocols that use similar staking systems to secure their networks. It is very likely that Web 3 applications will provide returns in this way as the premise behind Web3 is decentralized ownership. Thanks to innovations in the crypto ecosystem, investors now have new ways to generate returns while supporting a global, free, open, and permissionless economy.