With every innovation comes new opportunities for individuals to make money. The same can be said for the current rapid growth of crypto. From day trading to mining, we hear stories from people who have made millions in a short amount of time. But other forms of crypto investment are also gaining in importance among users, such as yield farming and staking. So what are they and how are they different?
Definition of yield farming in crypto
Yield farming is a popular way to passively generate crypto tokens as income. You deposit your crypto assets on a platform that lends them to other liquidity providers and exchanges. This allows you to earn both interest and part of the transaction fees.
How does yield farming work?
Decentralized exchanges typically work with Automated Market Makers (AMMs). These are programs that allow users to trade with a pool of funds rather than a counterparty. To ensure there are enough tokens for smooth trading, DEXs draw from liquidity pools.
Yield farming involves lending your crypto funds to DeFi lending platforms, which further use them in liquidity pools. In return, you receive interest that helps you grow your crypto holdings.
risks and rewards
Yield farming puts your idle crypto funds to good use and allows you to start earning with little to no effort. The returns can also be very lucrative, especially if you start early in the project cycle.
However, one of the main concerns with yield farming is the volatility of crypto prices. This volatility can cause temporary losses in your funds that become permanent when you decide to withdraw them.
Definition staking in crypto
Staking is a consensus mechanism that allows users of a blockchain to participate in its validation process. When you lock your crypto on the platform, it acts as your “stake” on the network. With this insert you can check whether transactions are real or fraudulent. Successful validation rewards you in crypto known as “Block Rewards”.
How does staking work?
Centralized platforms have their proprietary methods of verifying transactions. This is not possible on a blockchain where there is no central authority for validation. Instead, the users of the platform have to help secure the network.
With proof-of-stake blockchains, this is done through staking. Staking serves as collateral against which you can participate in validation. You can earn rewards when you successfully validate a transaction block and add it to the blockchain. However, if you act maliciously or validate fraudulent transactions, you will lose part of your stake.
Learn what a Proof of Stake is
risks and rewards
Staking allows you to earn while supporting a network you are using. Stakers are critical to the smooth operation and longevity of a blockchain, so supporting a platform with staking also secures its future.
The main risks that plague staking are network outages, validator risks, and project failures. If the network is unstable, your earnings may also fluctuate. Choosing the wrong validator node to stake can result in a decrease in your staked amount. Finally, do your research before choosing a project to engage with.
Learn more about what matters in depth
Differences between yield farming and staking
|types of assets
|All crypto tokens
|Medium to low
|Complexity and effort required
|Can be complicated
|Just get started
|type of investor
types of assets
Yield farming allows you to lend out virtually any asset you need. All of this can be done through a single platform like Aave or Compound, making the process easier to manage.
However, staking requires that you use the native token of the network itself. For example, if you are staking to the BNB smartchain, you must use the BNB token. You cannot use Ethereum or Bitcoin for this.
At the beginning of the life of a crypto project, there can be very few lenders of the token. Be among the first to earn very high returns, with some cryptos offering over 70% returns per year.
Staking is a more stable investment where your return is mainly determined by the price of the token and the amount distributed as block rewards. Yields are also lower, with some blockchains offering around 10% per year.
Complexity and effort required
Yield farming is not a very simple process. It requires an understanding of the overall DeFi lending space as well as the expected returns for a given asset. Optimal farming can even involve swapping between multiple tokens to get to the asset with the highest yields.
Staking is easy. All you have to choose is the platform to secure. Next, select a validator and wager the required number of tokens to start earning. This process is only complex if you decide to run a validator node yourself, which is prohibitively expensive for most investors.
As mentioned above, yield farming comes with more risk than staking given the higher return potential. Yield farming faces volatility risks and coin defaults, while staking suffers to a much lesser extent.
Suitability for different types of investors
If you are an experienced crypto investor who is very familiar with DeFi lending practices, yield farming might be the right choice for you. If instead you are a novice investor or like to be risk averse, staking is more appropriate.
What is better in the long term and in the short term?
Each form of investment offers its own advantages. Staking can start generating returns immediately with any validated block. On platforms like Ethereum, a block reward is distributed every 12 seconds. The returns from this are stable but low over the long term.
Yield farming does not require you to lock your tokens. If you want a highly liquid investment option, you can switch between different platforms when farming to get the highest possible returns from your funds.
In the end, yield farming can be the better long-term investment as it allows you to reinvest and switch between high-interest platforms. This translates into much higher potential returns over the long term, with greater risk.
Read more: 8 ways to earn passive income through crypto
Is yield farming better than staking? Both yield farming and staking have led to better outcomes for crypto investors. Yield farming in particular is a very lucrative option, but only if you accept the associated risks. On the other hand, there is staking, where you can earn a steady stream of income with a relatively low risk of loss. Ultimately, the choice comes down to your experience and preferences as an investor.
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Frequently Asked Questions About Yield Farming VS Staking
Is yield farming safe?
Yield farming can be safe if you lend to low-risk projects. However, maximum returns come from much riskier investments, where there is a chance of failure and you losing your investment. Do your research and weigh the pros and cons of each project to find the best option for you.
Is Crypto Staking Safe?
Staking is a surefire way to earn steady returns through a platform you support. If you choose well-established blockchains to bet on, the chances of failure are very slim. But the expected returns from staking also reflect this low risk.
Disclaimer: Crypto products and NFTs are unregulated and can be very risky. There may be no regulatory recourse for losses from such transactions. Each investor must conduct their own research, or seek independent advice if necessary, before initiating transactions in crypto products and NFTs. The views, thoughts and opinions expressed in the article belong solely to the author and not to ZebPay or the author’s employer or any other group or individual. ZebPay shall not be liable for any act or omission or any loss incurred by investors. ZebPay has received no cash or in-kind compensation for the above article, and the article is provided “as is” with no warranty as to completeness, accuracy, timeliness, or the results to be obtained from the use of this information.
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