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Yield farming and staking can be great ways to earn more crypto from the holdings you already have. But is one better than the other?
Yield farming and crypto staking can both be effective ways to earn interest and rewards on your crypto holdings. If someone has a lot of crypto that is expendable to them, they can use it or farm it to generate income. While both methods can be very rewarding, they also come with their risks.
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Crypto assets used for farming or staking may be subject to hacks or fraud. They also don’t allow you to withdraw these contributions if the price of the crypto you’re submitting goes down and you want a withdrawal. One method is not necessarily better than the other.
What is yield farming?
Yield farming is when a crypto holder provides liquidity to an automated market maker (AMM) or some type of crypto platform. This holder is known as a Liquidity Provider (LP), and the cryptocurrency that the person offers is placed in a liquidity pool. A liquidity pool is essentially a large sum of funds locked in a smart contract. The pool will consist of funds from a number of liquidity providers.
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These pools support the operation of decentralized exchanges as they help provide liquidity, speed and convenience to these platforms. In return, the liquidity providers receive revenue based on a percentage of transaction fees, annual interest, or governance tokens. Liquidity mining occurs throughout the yield farming process, i.e. when participants provide crypto to liquidity pools and in return these providers earn tokens and fees.
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Depending on how the platform determines the contract period, the pool can have a fixed or flexible period. Fixed term pools may offer higher or lower annual returns than flexible pools, depending on what the AMM prefers at the time.
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One of the most common yield farming rewards is the platform’s governance token. An example of a governance token is BNB, the governance token for the Binance platform. Binance provides users with yield farming opportunities that allow them to earn BNB tokens as rewards. Users can then exchange these tokens for other cryptos on the native exchange or other exchanges that accept the governance token.
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A major disadvantage of yield farming is temporary loss. A temporary loss is when you deposit crypto into a pool and the price of that crypto later increases in price, but when it comes time to withdraw your contribution, you will not make a profit on the amount the price increased to . The posts instead remain the same value as your original post.
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Another disadvantage is that the smaller your contribution to the pool, the smaller your reward will be. This correlates with a temporary loss, because if you contributed 100 ETH and the value of Ether doubles an hour later, someone who contributes 100 ETH when doubling has a larger share of the pool.
What is crypto staking?
Staking is similar to yield farming in that you offer your stocks in exchange for rewards. When someone stakes their cryptos, they are given the opportunity to use their stake to validate a transaction. When this stake is selected to confirm a transaction, that person receives a reward, which is usually their staked token or a governance token.
The more crypto you use, the higher the chance that you will be selected. Staking helps operate cryptocurrencies that use a Proof-of-Stake (PoS) model. The cryptocurrency you wager stays with you, but you may not be able to use it for a period of time.
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