Why Liquid Staking is the Safest DeFi Solution
Key Takeaways
- DeFi offers multiple ways to earn rewards, but each mechanism comes with different risk factors.
- Liquid staking is the safest DeFi option because it avoids impermanent loss, liquidations, volatile reward tokens, and dependency on market activity.
- Tonstakers ensures secure staking by protecting users from slashing, making it a reliable way to earn passive income.
Tonstakers provides a safe and predictable staking solution, shielding users from slashing risks and ensuring steady rewards. While other DeFi mechanisms may offer higher yields, they come with increased risks that users should carefully evaluate.
In the early days, users had only one way to earn in the crypto space: buying low and selling high. Times have changed with DeFi inventions, providing numerous opportunities to earn rewards for providing liquidity — along with more risks to consider.
In this article, we will explain the most popular DeFi mechanisms:
- how they work,
- where the yields come from,
- what the risks are,
- and what is the safest way to make passive income on TON.
What is DeFi?
Decentralized Finance (DeFi) refers to decentralized applications that focus on financial services. For example, decentralized exchanges enable users to swap tokens, and decentralized lending protocols allow borrowing funds using smart contracts without middlemen.
One feature that distinguishes DeFi from centralized financial organizations like banks and stock exchanges is that all users can provide liquidity to the protocol and earn a share of its revenue. By providing liquidity, users allow the protocol to use their tokens for operations, similar to how banks use clients’ deposits to offer loans.
All DeFi protocols share a common risk factor: tokens’ price can go down and nivelate all previously accumulated rewards. Although, native tokens are less subject to such risk, and stablecoins have stable price at all time.
What is Liquid Staking?
Staking is the cornerstone of all Proof-of-Stake networks, including TON. Validators launch their nodes and gain validating power by locking up their TON. For each block they create, they receive a fixed reward of 1.7 TON and collect all transaction fees included in that block.
Liquid staking protocols like Tonstakers enable users to delegate their TON to validators for a limited time, increasing the validators’ power and earning a share of the staking rewards.
Crypto Staking Risks
There is one main risk factor — slashing, a fine imposed on misbehaving validators. Thankfully, liquid staking users aren’t affected by slashing because liquid staking smart contracts are designed so that validators cannot return fewer tokens than they received from users. Learn more about it in our article about slashing in Telegram.
Crypto Staking Rewards
Staking rewards come from the blockchain protocol itself and remain stable through for a long time. Also, staking rewards are paid in the blockchain’s native token, which is usually the most liquid and valuable one with great market support. For staking with Tonstakers users receive rewards in TON, which is valued at $13 billion at the time of writing.
What is a DEX?
A Decentralized Exchange (DEX) uses two-token liquidity pools to swap one token for another. Users provide two tokens, such as TON and USDT, to the pool. Traders can then exchange USDT for TON and vice versa.
For each exchange, traders pay a fee in the token they want to swap. The liquidity pool collects these fees and distributes them among all liquidity providers.
However, this mechanism carries a unique risk — impermanent loss: if one token in the pair loses value, the balance in the liquidity pool drops, and the liquidity provider might withdraw fewer tokens than they invested.
Additional DEX Liquidity Provision Risks
Rewards for DEX liquidity providers come from active traders. If there are only a few trades per day, liquidity provider earnings are small. Also, the rewards are paid in the provided tokens, which can drop in value far quicker than the native token like TON. Considering these factors, reward rates are unpredictable and can vary daily.
What is a Lending Protocol?
Lending protocols allow users to borrow one token by providing collateral in another token. This mechanism is useful for obtaining liquidity for short-term opportunities and leveraging positions in other DeFi protocols.
Lending protocols can be complex. For example, when you provide USDT to the protocol, other users can borrow your USDT with an obligation to pay you interest and return the USDT. If they cannot repay the loan, the protocol will liquidate their collateral to return the amount to you.
The lending protocol’s liquidation mechanism creates risks: if the collateral value drops quickly, liquidity providers may receive fewer tokens than they deposited.
Additional Lending Protocols Risks
Like with DEXes, in lending protocols rewards are paid by the active borrowers. If there is no demand for the token you provide, the rate will be low. Similarly rewards are paid in the provided tokens, which can drop in value and the reward rates aren’t fully predictable.
What are Perpetual Swaps?
Perpetual swaps work like margin trading with leverage on centralized exchanges but are decentralized and permissionless. Traders borrow tokens from liquidity providers to facilitate short selling and leverage.
Liquidity providers deposit their tokens for traders to borrow. If traders incur losses, their margin is shared among the liquidity providers. However, when traders profit, they are paid from the liquidity providers’ tokens — posing a substantial risk for liquidity providers.
Additional Perpetual Swaps Risks
With perpetual swaps liquidity provision, rewards do not only come from active traders, but from unprofitable traders. If the market is still and fewer trades happen, then earnings will drop. Plus, it has the usual DeFi risks like rewards paid in volatile tokens at unpredictable rates.
What is Farming?
Farming is a method to create additional incentives for liquidity providers. In most DeFi protocols, users receive Liquidity Provider (LP) tokens as receipts for providing liquidity. These receipts are necessary for withdrawing the provided tokens and thus have value.
Some protocols launch farms, where liquidity providers can lock their LP tokens to earn additional rewards.
Additional Farming Risks
Farms inherit all risks from the protocols users get their LP tokens. For example, DEX farmers are exposed to impermanent loss and in the event of a rapid token value drop they will lose time by withdrawing liquidity first from farms, then from DEX.
Conclusions
We have covered the most popular DeFi mechanisms present in TON ecosystem, each offering different risk/reward conditions. Liquid staking stands out as the safest option for five reasons:
- No impermanent loss
- No liquidations
- No rewards in highly volatile tokens
- No dependence on other users’ activity
- No complications in the withdrawal process
Additionally, Tonstakers protects users from slashing — the only risk validators face through staking, making it the most secure DeFi protocol both by economical and technical means.
Although staking might have a comparatively low reward rate, it is predictable and won’t change overnight. Higher rewards in other DeFi protocols always come with higher risks, but liquid staking offers a balanced and secure way to earn in the DeFi space.