Crypto Staking 101, What is it All About?

| November 17, 2023

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Crypto Staking 101

Cryptocurrencies are undoubtedly one of the most popular asset classes that present a huge profit-making potential to investors. The most common ways to make profits on crypto investments is either through appreciation in the value of assets held over a long term or by trading them against fiat and other crypto assets to capitalize on the price difference arising out of market movements.

Crypto trading requires the active involvement of asset holders, using various available crypto-trading instruments, many of which share similarities with the traditional ones dealing with forex, stocks, commodities, derivatives, and more. However, there is another way to generate returns from crypto holdings which has become quite popular with DeFi applications, and it is called Staking.

What is Staking?

In general, Staking is the process of contributing toward certain network functions by locking crypto assets on a smart contract. In return, the protocol will issue rewards in the form of their native tokens as an incentive for participation. The rewards continue to be issued as long as the tokens are staked, and at the end of the staking period, users can withdraw those staked assets to their wallets.

Proof-of-Stake, where Staking Secures the Blockchain

The origins of staking can be traced back to the introduction of the Proof-of-Stake consensus mechanism in the crypto ecosystem. Unlike the Proof-of-Work consensus popularized by Bitcoin, where miners discover new blocks by solving complex cryptographic problems and commit transactions on them, Proof-of-Stake (PoS) protocols randomly assign validators for each new block to validate and confirm transactions happening over the network.

Validators operate blockchain nodes on a PoS blockchain, and to become one, they need to stake a minimum prescribed amount of native protocol tokens. These staked tokens act as a security deposit to ensure sufficient uptime of nodes and as a deterrent to any malicious activity on the node operator’s part. While there is no upper limit for the staking amount, weightage is given to validators with the highest stake resulting in more blocks being assigned to them. For their services, validators receive rewards in the form of freshly minted protocol tokens and/or a portion of transaction fees collected by the network.

Staking to Earn on a PoS Network

While validators earn by staking their tokens and performing critical functions necessary for the upkeep of a PoS network, regular crypto users can also benefit by staking their tokens with validators. In a process called delegation, community members and protocol token holders can stake their assets with existing validators. By doing so, they contribute to the overall staking volume of the validator and receive a share in rewards earned by the validator. While the reward percentage may not be as high as those received by the validators, delegators get to earn a passive income without having to worry about staking volumes and infrastructure requirements.

While earning considerable gains is a common theme in staking, it provides far more benefits than those that meet the eye. A powerful incentive that staking gives network participants, both validators and delegators, is that they are involved in making decisions that govern the future of the blockchain network. This concept of governance based on users staking their assets has also led to the rise of entities in the decentralized world known as Decentralized Autonomous Organizations (DAOs).

Moreover, the PoS consensus mechanism eliminates the need for high processing power, reducing the power consumption of blockchains by up to 99%, making this technology highly sustainable. PoS is also making blockchain networks scalable and increasing their throughput. With more people exploring what DeFi has to offer, the increased scalability, thanks to PoS, is a major boon.

Staking On DeFi Protocols

While staking can secure entire blockchain networks and reward participants for their efforts, following a similar mechanism to contribute to DeFi protocols also earns rewards for stakers. Far from securing a blockchain network, the concept of staking in the DeFi ecosystem refers to liquidity provisioning to various protocols by depositing crypto assets over a certain duration. Today, staking is a highly popular means of investment in DeFi, which ensures the presence of liquidity in protocols like lending-borrowing platforms, AMM DEXs, and more. The rewards offered for DeFi staking, as well as the risk they carry, varies from one protocol to another. While staking in reputed platforms is relatively low risk, it is generally outweighed by the reward payouts they offer. However, one should do their own research about the reliability and sustainability of the DeFi protocol, security concerns, and more before investing in any of them.

Lending Pools

Lending pools are a common sight in various lending-borrowing protocols where liquidity is provided by the community to issue loans. In return, stakers earn a portion of the interest paid by borrowers in proportion to their contribution to the lending pool. The interest varies based on the demand for staked assets — higher demands mean higher earnings and vice versa.

Liquidity Pools

Staking in liquidity pools of DeFi exchanges known as AMM DEXs allows the platform to maintain sufficient liquidity of supported token pairs. Most liquidity pools require users to stake an equivalent value of both crypto assets in a token pair, allowing other users to swap one token for another. Whenever a swap occurs, the token to be exchanged will be deposited into the liquidity pool and the corresponding token in the token pair is withdrawn for the pool into the user’s wallet. Each swap will have an associated exchange fee, and a percentage of such fee is proportionally distributed among liquidity providers.

Whenever a user stakes a token pair on any liquidity pool, LP tokens signifying their contribution will be issued, which can be used to reclaim their stake at a later date. To encourage liquidity provisioning, many protocols offer additional incentives to LP token holders.

Yield Farming

Staking LP tokens on farming contracts is generally known as yield farming. Known to offer high returns, farming protocols allow users to stake LP tokens received while staking asset pairs in liquidity pools to earn additional rewards in the form of one or both tokens that are part of the liquidity pool. Also known as liquidity mining, stakers on yield farming platforms receive rewards on top of the earnings accrued from liquidity provisioning on AMM DEXs. Meanwhile, by offering additional rewards through yield farming, projects keep existing liquidity providers locked in while attracting new investors to ensure adequate liquidity in the protocol at all times.

That’s not all, many crypto projects also offer staking opportunities within their protocols to incentivize early token holders. By offering them rewards in the form of additional utility tokens of the project for locking their tokens for a certain duration, these projects effectively discourage community members from selling the tokens, thereby restricting supply in the open market, which results in increased valuation of the said token.

Now, Should You Consider Staking Your Crypto Assets?

Staking is benefitting everyone in the cryptocurrency community in various ways. It is changing blockchain technology for the better, making it scalable and green — all while generously rewarding those involved. Of course, it comes with its risks like any investment tool. But thorough research and planning can offer you great rewards — monetarily and beyond, like highly democratic protocols whose future you can influence.

At Liminal, when it comes to staking, we have plenty of things to talk about. Keep an eye out on our blog and official channels for announcements regarding our Staking Solutions.

Learn more about Liminal here.

Become #LiminalSecure today, and do not forget to follow our blog and social media channels to keep yourself updated.

More on Crypto

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Hello world, it’s that time of the month when we share the biggest security breaches in the world of Web3 through our Security and Regulatory Newsletter. 

Liminal believes in optimizing security and custody practices globally across the Web3 industry. Through our Newsletter, we highlight security, regulations, and compliance incidents that have happened in the past month and how one can follow better Security practices to safeguard their digital assets. 

We will also highlight regulatory changes that might have happened globally, which were significant to the overall ecosystem.

Dive in and get a detailed analysis of everything security and regulation in the domain of web3 with Liminal’s Monthly Security and Regulatory Newsletter.

Web3 Security Compromises in January

Abracadabra exploited for almost $6.5 million, Magic Internet Money stablecoin depegs

The Magic Internet Money ($MIM) stablecoin has lost its dollar peg again, dipping all the way below $0.77 in a flash crash before returning to around $0.95.

The depeg appears to be related to an exploit of the Abracadabra lending protocol, which allows people to borrow $MIM. An attacker exploited an apparent flaw in the platform’s smart contracts to drain around $6.5 million.

Goledo Finance hacked for $1.7 million

Goledo Finance, an Aave-based lending protocol, was exploited through a flash loan attack. The attacker stole assets estimated by CertiK to be around $1.7 million.

Goledo Finance contacted the attacker to offer a 10% “bounty” for the return of the remaining assets. In a message on January 29, the attacker wrote: “I hacked Goledo and want to negotiate.”

Socket service and its Bungee bridge suffer $3.3 million theft

The Socket cross-chain infrastructure protocol was hacked for around $3.3 million in an attack that exploited its Bungee bridge. The thieves were able to exploit a bug that allowed them to take assets from those who had approved a portion of the system called SocketGateway.

A little over 700 victims were affected, and the highest loss from a single wallet was around $657,000. 121 wallets lost assets priced at more than $10,000.

On January 23, the protocol announced they had recovered 1,032 ETH (~$2.23 million) of the stolen funds.

Web3 Regulatory Practices for January

The EU Imposes Stricter Due Diligence Rules for Crypto Firms

On Jan. 17, the European Council and the Parliament came to a provisional agreement on parts of the Anti-Money Laundering Regulation (AMLR) that now extends to the crypto sector.

Under the new rules, cryptocurrency firms will be required to run due diligence on their customers involving a transaction amounting to €1,000 ($1,090) or more. 

However, the agreement isn’t final yet as it has to be first officially adopted by the Council and Parliament before the rules can be applied.

So, after the EU passed its landmark MiCA regulation last year, which clarified rules about cryptocurrencies, regulators are now targeting the space with tighter controls. 

While these regulations bolster security and trust in the crypto market, potentially attracting more cautious investors and combating financial crimes, they also present challenges. 

The US State of Virginia Introduces Digital Assets Mining Rights

Recently, the Virginia State Senate introduced Bill No. 339, which outlines regulations for the transactions and mining of digital assets and their treatment under tax laws. 

The legislation exempts individuals and businesses engaged in crypto mining activities from obtaining money transmitter licenses. Additionally, it protects miners from any discrimination. 

Issuers and sellers of crypto are also exempted from securities registration requirements if certain conditions are met. Moreover, those offering mining or staking services are not to be classified as “financial investment” but must file a notice to qualify for the exemption.

The bill further incentivizes crypto’s use for everyday transactions by offering tax benefits. Under this, up to $200 per transaction can be excluded from an individual’s net capital gains or gains derived from using crypto to purchase goods or services, starting from Jan. 1, 2024.

Key Takeaways:

  • Hackers continue to exploit vulnerabilities in DeFi protocols and cross-chain bridges, highlighting the need for robust security measures.
  • Regulatory frameworks are evolving rapidly, with stricter AML rules and supportive legislation for emerging technologies like crypto mining.
  • Staying informed about these developments is crucial for navigating the digital assets market safely and responsibly.

Stay #LiminalSecure

These events highlight the constant evolution of Web3 security and regulation. You can confidently navigate this dynamic landscape by staying informed and prioritizing security best practices. 

At Liminal, we’re committed to empowering institutions to unlock the full potential of digital assets without compromising security or compliance norms with our robust custody and wallet infrastructure solutions. Join us on this journey towards a safer, more accessible future for digital assets.

January 15, 2024

Buckle up as we’re about to take a trip down memory lane. 

The year 2023 was a wild ride that showed signs of a plummeting market, groundbreaking innovation and regulatory hurdles. 

Contrastingly, in the same year, we saw no market-shattering crashes. Financial institutions extending an olive branch, key jurisdictions unlocking the doors to blockchain technology. 

Simultaneously, at Liminal, we experienced significant breakthroughs, re-engineering our positioning and becoming a pioneer in digital asset security with bank-grade custody. 

We took major strides this year, right from building comprehensive products to becoming a qualified custodian, from revamping our brand design to expanding our offices in newer locations, from partnering with hyper-local communities to onboarding a diverse set of clients,  we did it all. 

So, let us take you through everything we accomplished in 2023 and what the future holds.  

Liminal Became A Qualified Custodian

One of the prominent moves we made this year was to change our positioning as a regulated custodian from being a wallet infrastructure platform. 

We got two licenses in key jurisdictions to operate as a regulated custodian. 

The first one came from Hong Kong, where we acquired the TCSP license issued by the SFC, which oversees and regulates financial activities to ensure compliance with legal and regulatory obligations. 

Our next license came in the MENA region, where we got In-Principle Approval for the FSP license granted by the FSRA, a governing body in ADGM, to establish a progressive financial services environment. 

Both these licenses paved the way for Liminal to push its wallet infrastructure and offer bank-grade custody to institutions looking to operate in these particular regions. 

Liminal Introduced A Suite of Products & Features

Continuing our building spree, we launched new products and integrations to broaden the existing infrastructure and added more parameters of security, scalability and sustainability. 

Staking-as-a-Service

Liminal launched staking for institutions to eliminate the risks involved in running staking nodes and the vulnerabilities in hot wallet transfer. 

Hence, we introduced an industry-first mechanism of cold wallet staking to ease staking for institutions and secure assets explicitly.  

Whitelabel Solution

Accelerating the go-to-market time for organisations looking to build a secure and customisable application, Liminal launched its whitelabel solutions

Targeted to help organisations meet security standards, manage assets with maximum control, and add their custom branding to give it a personal touch. Our whitelabel solution is a first-in-class custodian-developed solution for institutional grade custody.

Smart Consolidation

We are building not just secure custody but also automation-based features to eliminate manual errors, increase the throughput of transactions and scale institutional wallets. 

Taking this ahead, we launched the Smart Consolidation feature to automatically calculate all the active addresses and consolidate them into a single address. With this level of automation, managing multiple addresses becomes uber easy for wallet teams. 

Travel Rule 

To limit the use of cryptocurrencies for activities like money laundering and terror financing by regulatory bodies, travel rule was mandated for institutions to follow. 

Continuing the latest compliance integration policy, Liminal partnered with Notabene to introduce Travel Rule, enabling institutions to manage counter-party risk and extend the process of due diligence right from the Vaults dashboard.   

Liminal Accured List Of Security Certifications

Following our ISO certification for data privacy and risk management, we added two new security certifications to fortify our systems and build trust for our clients. 

Liminal Achieves Crypto’s Highest Security Mark: CCSS Level-3 Certified

Cryptocurrency security lacked a gold standard, creating a vulnerable ecosystem. Enter the CryptoCurrency Security Standard (CCSS), setting the bar for auditing and certifying custodian infrastructure and establishing levels of trust and confidence for investors. 

Liminal became only the second wallet infra platform and the first regulated custodian to be accredited with Level-3 certification, deeming wallets, transfer environments, workflows and engines safe and secure. 

Liminal Reciueved SOC 2 Type II Certification

To tackle threats in institutional-grade security, organisations’ SOC has been identified as the primitive compliance standard for service organisations to handle customer data.

Liminal successfully attained SOC 2 Type II certification, validating its setup of security controls & compliance processes to be industry standard. 

Liminal Level Up

Liminal unveiled its most significant platform upgrade ever, revolutionising the future design standard of a qualified custodian. This level-up activity included revamping our website and product UI, giving a completely new look and feel to not “Liminal” but “Liminal Custody”. 

The Liminal level-up activity was a strategic step and the biggest one for us this year to create an intuitive, inviting and tailored experience for our clients. 

Liminal Reached New Borders

We spread out our operations this year, reaching new borders and onboarding a new wave of institutions across gaming, DeFi, HNI wealth, treasuries, and exchanges! From Indonesia and Africa to India, UAE, and Korea, we are setting up custody operations worldwide. 

This isn’t just a roster of clients; it’s a network ready to spark connections, collaborations, and shared success to further the definition of secure assets. 

Liminal Collaborated With Law Enforcement Agencies

The best and the proudest moment of Liminal for this year was when we collaborated with CBI & Himachal Prashesh police department to aid them in seizing digital assets. 

This partnership put us on the map, as we became the first point of contact for LEAs in India, and we standardised the process of secure seizure of digital assets. Leveraging our expertise, we enabled a safe space for officers to learn the basics of custody, contributing to a safer digital landscape.

Team Liminal Grew Bigger

Building such a massive infrastructure, prioritising security and compliance over everything else, we had to grow the team to build at pace and expand at an even higher level. Not only did we grow in team numbers, but we also elongated our footprint to new destinations. 

Team Liminal went from 32 to 70 with 5 new offices in Mumbai, Ahmedabad, Hong Kong, Singapore and ADGM, setting up our custody operations steadfastly. 

What’s To Look Out For In 2024

We are excited to announce that our commitment to integrating the most secure digital asset wallets with a cutting-edge custody platform is swiftly becoming a reality. 

The upcoming year, 2024, will serve as a testament to this transformative journey. Moving beyond self-custody, we are constructing a comprehensive infrastructure encompassing both custodial and non-custodial wallets. Exciting products are set to launch starting from the first week of January, some of which are: 

  • Official Custody Platform Launch
  • Liminal’s Off-Exchange Settlement Hub
  • Secure Custody of Real-World ‘Tokenised’ Asset

The Web3 space has evolved explicitly this year, pushing the narrative of secure digital asset custody and security, introducing new regulations and compliance standards, licensing VASP providers and standardising the use of custodians as a trusted third party. 

At Liminal, we took major strides this year, from building comprehensive products to becoming a regulated custodian, from revamping our brand design to building the full infrastructure of custodial and non-custodial wallets.

January 5, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture