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DeFi 101_ 5. Introduction to Staking and LST with @sanctumsol.mp3

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What is Staking? Staking involves locking up cryptocurrencies to support a blockchain network’s operations and security, akin to depositing money in a savings account. Participants commit their tokens to validate transactions and sustain the network, which typically employs a Proof of Stake (PoS) mechanism for consensus. In return, stakers earn rewards, often derived from transaction fees or newly created tokens, and may participate in governance decisions. Staked assets are usually locked for a specific period, during which they cannot be traded. Although staking can yield returns, it also carries risks associated with price volatility and the network's security vulnerabilities.

Additionally, staking can be conducted directly through a blockchain protocol or via staking pools. Direct staking allows token holders to participate individually, committing their own resources to support network operations. Staking pools, on the other hand, enable multiple users to combine their resources, thereby increasing their chances of earning rewards and reducing the entry barriers by allowing participants with smaller amounts of tokens to join.

What is an Epoch? An epoch in a blockchain context is a fixed period during which blocks are created, validators are rewarded or penalized, and validator assignments may be shuffled. This structure helps organize the timing and sequence of these actions within a blockchain network, ensuring systematic operations. A simple analogy for an epoch is to imagine it as a "shift" or "cycle" during which certain tasks must be completed before the next cycle can begin.

As a practical example, imagine the process of staking could be thought of as depositing your "gold bar" (Solana tokens) into a secure vault. This action, much like in traditional banking, has a processing period. In blockchain terms, this is often referred to as the "cooldown" period for staking and unstaking, which aligns with the duration of an epoch. During this time, your assets are locked, and you must wait for the epoch to conclude before making further changes to your stake.

Three key drawbacks of native staking:

• Lock-up period: Your Solana is locked during a 2-3 day epoch.Monitoring required: You must actively monitor the validators to ensure they function correctly; failure to do so can result in penalties, affecting your rewards.Lack of flexibility: You cannot use your staked Solana for other purposes, such as participating in DeFi. This limitation is addressed by liquid staking (LSTs).
• Monitoring required: You must actively monitor the validators to ensure they function correctly; failure to do so can result in penalties, affecting your rewards.
• Lack of flexibility: You cannot use your staked Solana for other purposes, such as participating in DeFi. This limitation is addressed by liquid staking (LSTs).