The world is slowly moving away from the traditional financial system towards financial blockchain technology solutions like crypto staking and cryptocurrency savings accounts.
Sometimes past, almost every financial transaction had to involve an intermediary, especially banks. But blockchain technology has eliminated the need for intermediaries by bringing the smart contracts concept that have lend to lots of innovative solution within the blockchain inductry; key among them being decentralised finance (DeFi).
Today there is a myriad decentralized finance (DeFi) protocols that have been developed to offer similar services as those offered by most of the traditional financial institutions.
The growth of the DeFi industry has accelerated and there is a surge in the number of people participating in DeFi protocols. By December 31, 2020, the DeFi industry had grown to 13 billion from $700 million the same time in 2019. In 2021, the growth has gathered more momentum and the industry is now worth more than $40 billion
One of the rapidly growing sectors within the DeFi industry is the crypto savings accounts that was forerun by the introduction of crypto staking. Most of the people participating in DeFi are choosing to open crypto staking and crypto savings accounts rather than just holding their cryptocurrencies waiting for the prices to rise.
Since DeFi protocols are taking up most of the services offered by traditional financial institutions like banks and insurance companies, people are starting to realize the advantages of investing in DeFi compared to investing in the traditional financial institutions. It is only a matter of time before crypto staking replaces the traditional savings account.
Crypto staking and crypto savings vs. traditional savings accounts
Before the invention of DeFi, cryptocurrency users could only make money by buying cryptocurrencies like bitcoin, Ethereum, and the like, hold the cryptocurrencies in their crypto wallets anticipating their market value to increase, and then sell them at a higher price making profits. Although there is still a good number of crypto investors who still do the same today, holding crypto assets in a wallet results in a negative yield because of the withdrawal costs, off-exchange, and on-exchange risks. Also, the cryptocurrency market is very volatile and you could be expecting the value of a crypto asset to rise but it ends up dropping by a huge margin.
DeFi protocols introduced crypto staking where cryptocurrency holders can lock up their crypto assets in their cryptocurrency wallets, or a cryptocurrency exchange wallet using smart contracts.
By locking up the crypto assets, the user authorizes the crypto exchange or DeFi protocol to use the staked tokens in either lending to borrowers or offering liquidity like in the case of automated market makers.
Besides staking, some crypto exchanges and other platforms offer dedicated crypto savings accounts that mimic the traditional bank savings accounts but with higher annual percentage yields (APYs).
In the traditional savings accounts, the APYs range from 0.1% to 0.6%. This means that you have to deposit huge amounts of funds to earn considerable interest through traditional savings. If you save $100,000 for one month (30 days) with bank savings account that offers an APY of 0.6%, for example, you would earn $50 (0.6/100 X 1/12 X $1000) in one month. This is a considerably low income.
Crypto savings on the other hand have relatively higher APYs; mostly above 1%. For example, Binance, one of the crypto savings account providers, offers APYs ranging from 1.2% to over 40% depending on the terms (flexible terms, fixed terms, or high-risk products), the staked crypto asset, and the duration of a crypto asset is staked. If you navigated to Binance Locked staking and chose to stake DASH cryptocurrency for 30, the APY would be 7.39%.
How to invest in crypto staking
To participate in crypto staking and crypto savings, simply find a DeFi protocol or a crypto exchange that offers staking and crypto savings functionality and register for an account.
Then go through their various products and find out the most suitable product to invest in.
If you want to invest in crypto staking, select the crypto asset you want to stake and stake your tokens. If you do not have the tokens in your account/wallet, you will need to first purchase the tokens for you to stake them.
Best crypto staking providers
- Figment Networks
- Stake Capital
- Staking Facilities
- P2P Validator
- Dokia Capital
How to invest in crypto savings
Cryptocurrency savings accounts are designed to only hold crypto deposits including stablecoins, bitcoin (BTC), Ethereum (ETH) and other cryptocurrencies.
Therefore, you will be required to choose the cryptocurrency you want to deposit so that you can open a savings account specific to that cryptocurrency. If you choose to open a BTC savings account, for example, you will be saving bitcoins.
However, it is important to point out that some crypto savings account providers accept users to make deposits using fiat currencies, which are then converted to the cryptocurrency they have chosen to open a savings account on.
Best crypto savings accounts
- Outlet Finance
- Celsius Network
Is it safe? What are the risks?
Though crypto staking is a safe way to earn a passive income from your crypto holdings, there are a number of risks associated with it.
In Binance staking, for example, you must be sure that you shall not need to withdraw the staked token before the agreed period since doing attracts a fine of about 5%. If you choose to stake ETH, for example, you should be ready to wait until the ETH 2.0 upgrade takes place, whose estimated time of arrival (ETA) is unknown.
Besides fines charged for withdrawing staked tokens before the agreed timespan elapses, there are other risks involved that include:
- Liquidity risk
The cryptocurrency market is quite volatile and the market prices of the crypto asset that you have staked may go up or down in a matter of seconds. In fixed locked staking for example, once you lock your tokens, there is nothing that you can do other than watch the market prices move up and down.
If the prices drop, the value of your staked tokens will depreciate meaning the value of your staking reward shall also decrease.
- Validator status risk
The status of the validator node of the network whose token you have staked is also a very important aspect when it comes to staking. There are several things like remaining operational always and having collateral that a validator needs to be recognized as an active validator.
If a validator becomes inactive, the staking rewards are halted or they are subjected to a slashing penalty depending on the network’s staking mechanism and this may result in some of the staked tokens being deducted from your stacked account.
- Validator commission and reward distribution mode risk
Validators also deduct their commissions and at times they may change the percentage of the commission without the consent of users and if you are not careful to adjust your stakes, you may end up receiving lower staking rewards.
Crypto staking is slowly but steadily replacing the traditional savings accounts especially since more people are now adopting cryptocurrencies and investing in DeFi protocols.
According to DeFi Pulse, a platform that provides an overview of the DeFi market, there is currently about $76.15 billion worth of crypto assets that are staked in DeFi platforms.