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DeFi & Staking

DeFi and staking explained: how decentralized finance works, how staking rewards are earned, the difference between staking, yield farming and lending, and how liquidity pools and impermanent loss work.

These guides explain DeFi and staking for beginners. DeFi (decentralized finance) is a set of applications, built mostly on Ethereum and similar blockchains, that let people trade, lend and borrow through smart contracts instead of banks or brokers. Staking means locking coins to help secure a proof-of-stake network in return for rewards. Both can generate yield, and both carry risks that are easy to underestimate.

Start here

  1. What is DeFi? Decentralized finance vs CeFi.
  2. Crypto staking explained: how rewards work.
  3. Ethereum staking: rewards, risks and how to start.
  4. Staking vs yield farming vs lending.
  5. What is a liquidity pool? AMMs and impermanent loss.

Key concepts

Where the yield comes from

Every yield has a source. Staking rewards come from new coin issuance and transaction fees. Lending yields come from borrowers paying interest. Liquidity pool returns come from trading fees, sometimes topped up with incentive tokens. If you cannot identify the source, treat the yield as a warning sign.

Liquidity pools and AMMs

An automated market maker (AMM) sets prices using a formula and a pool of two or more tokens supplied by users. Providers earn a share of fees but can suffer impermanent loss, ending up worse off than if they had simply held the tokens when prices diverge.

Lockups and liquid staking

Some staking has unbonding periods before you can withdraw. Liquid staking issues a token representing your staked coins so you can still use them, adding another layer of smart contract risk.

Checking a protocol

Before depositing, look at how long the protocol has run without incident, whether its code has been audited, how much value it holds, and who can change its contracts. Audits reduce but do not remove risk.

Risk note

DeFi risks include smart contract bugs and hacks, oracle failures, stablecoin depegs, slashing on staked coins and platforms that freeze withdrawals. Advertised rates can change daily. Rewards are often taxable as income in the US. Start small and learn about wallet security first.

DeFi & Staking: frequently asked questions

Is staking crypto safe?

Staking is not risk-free. You can lose value if the coin's price falls, face lockup periods, or lose part of your stake through slashing if a validator misbehaves. Staking through a platform also adds the risk that the platform fails.

What is the difference between DeFi and CeFi?

DeFi runs on smart contracts, and you usually keep control of your wallet. CeFi (centralized finance) means a company such as an exchange holds your assets and runs the service. CeFi is often simpler; DeFi offers more control but puts more responsibility on you.

Are staking rewards taxed?

In the US, the IRS has said staking rewards are generally taxable as income when you gain control of them, and selling later can create a capital gain or loss. Other countries treat rewards differently. Check your local tax authority's guidance.