The cryptocurrency industry and the broader decentralized finance (DeFi) sector have spawned innovative financial products and services.
While one goal was to function separately from the banking system, crypto has done an incredible job of mirroring many of the same products that the conventional financial sector offers.
A case in point is yield farming and staking.
Many crypto enthusiasts have found ways to ensure their money is working for them rather than sitting idle in an account waiting for another bull market to rally.
But are yield farming and staking the same thing? NO.
So, in the cryptocurrency world, what is the difference between yield farming and staking anyway?
What is yield farming vs staking?
First, yield farming is when you lend your digital tokens to a decentralized exchange, also known as DEX. The DEX provides liquidity levels for specific trading pairs. Yield farming has been described as a rewarding way to generate passive income with idle tokens in your wallet or on an exchange – you also have access to both tokens from a trading pair, which is also an advantage.
The term comes from analogies with farming as it allows users to grow their cryptocurrency assets.
Second, staking is slightly different from farming, as in many cases users lock their crypto assets to secure a Proof-of-Stake (PoS) blockchain network. A PoS is a crypto consensus mechanism for creating new blocks on a blockchain and processing transactions. It is an upgrade of the energy-intensive Proof-of-Work (PoW) model that has been standard since Bitcoin’s early days.
Inside yield farming and staking
With a yield farming pool, you do not have to agree to a minimum holding period and you can withdraw your tokens at any time. On the other hand, when staking, your tokens will be locked in no time. However, some DeFi exchanges offer flexible staking terms.
Staking comes with a fixed APY, so investors know exactly how many rewards they will get after the staking term ends. Yield farming is more volatile and many users need to know what yield they will get. However, the odds of getting a higher yield can be better with yield farming than with staking, mainly because the risks are greater.
For example, you only need to deposit a single token when wagering. However, yield farming requires a trading pair and requires you to deposit equal amounts of each token within a pair. Still, staking offers attractive fixed APYs.
Staking is now more suitable for PoS coins. Using a DEX (with yield farming) gives you access to higher yields and a broader pool of supported tokens beyond PoS coins. Additionally, yield farming allows you to have a more diversified portfolio compared to staking, which is crucial in any type of market, whether bullish or bearish.
When assessing the risks with these two approaches, users compare the risk of depreciation losses from yield farming and the opportunity cost of locking tokens for staking. The other risk is that you lose if the token goes down in value, whether it’s a liquidity pool or a staking pool.
What is an effective strategy?
From added risk to high returns, both yield farming and staking can be effective strategies to generate passive income.
Yield farming is more complicated than staking as it requires more research to make profitable investments. Staking is easier to learn because all you have to do is choose a staking pool and lock your tokens. Simply put, yield farming requires more active management, while staking requires less effort.
Staking has no transaction costs as funds are locked – there is no need to switch pools – and the process maintains lower maintenance costs. At the same time, yield farming offers greater flexibility, but you have to pay transaction fees to make transfers and switch between liquidity pools.
Overall, staking and yield farming are sensible and rewarding strategies, but they can also come with risks. Ultimately, your option should be based on your level of investor experience, due diligence and research, and short- and long-term investment goals.
In fact, the crypto ecosystem is undergoing significant changes, with industry watchers expecting the sector to see a revolution that seems common every few years. Will you be a part of it or will you wait until it’s too late? Get started with Bitbuy today!
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