Metaphors are useful tools for explaining novel concepts. In our last post, we explained Decentralized Finance (DeFi) through that method. Now, it is time to go one step further and learn what "staking" is and how it differs from "liquid staking." Are you ready 👀?
Imagine a prestigious art gallery in a big city. This gallery has strict rules:
Only certain people can buy or lend art.
The gallery decides the prices and manages all transactions.
If you lend your painting to the gallery, you can only access it once the gallery decides to return it.
This is like traditional finance, where banks and financial institutions control transactions and access to financial services.
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Now, imagine a new kind of art gallery that operates differently:
✨ Open to All: Anyone can lend or borrow art without needing special permission.
✨ Direct Transactions: Artists and collectors can trade directly with each other.
✨ Smart Contracts: Instead of gallery managers, magical frames (smart contracts) automatically handle trades and loans based on transparent rules.
In this decentralized art gallery, you can lend your painting to the gallery. The gallery uses your painting to attract visitors, and in return, you earn a share of the ticket sales. However, your painting is locked up in the gallery for a set period, and you can't use it during that time.
This is like staking in DeFi. You "lock up" your cryptocurrency to support the network, and in return, you earn rewards, but you can't use your crypto for a set period.
Now, let's introduce a twist to our decentralized art gallery:When you lend your painting to the gallery, you receive a special "Art Token" that represents your painting's value.This token is magical because you can:
✨ Keep it and still earn a share of the ticket sales.
✨ Trade it with other art lovers if you want to get something else.
✨ Use it to buy other artworks or services in the gallery.
At any time, you can trade your token back for your original painting (or maybe even a more valuable one if the gallery does well). This is like liquid staking. You still earn rewards for supporting the network, but you also get a token that represents your staked assets. You can use this token in other ways while still earning staking rewards.
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