Most will tell you that the cryptocurrency market growth is only a good thing. However, it also prevents regular investors from buying the dip and profiting quickly. As a result, people are turning to passive earning as opposed to active cryptocurrency trading. Yield farming and staking are the two most popular alternatives.
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Each method has its own way of getting your crypto up and running, but which one is the best for the average investor? Today we intend to settle the debate between yield farming and staking once and for all.
We look at each passive investment strategy individually and compare them at the end. Are you ready to retire from risky active trading? Alright, let’s get started!
What is yield farming?
Yield farming is a popular way to increase crypto holdings through lending. The name derives from the idea of using your coins and thereby increasing them. But how does the process work?
Everything starts with DeFi (Decentralized Finance) platforms. These projects require large amounts of cryptocurrencies that can be traded, loaned, borrowed and used for actions on the blockchain. However, nobody has enough real money or coins to create money out of thin air.
Because of this, DeFis offer high interest rates in exchange for users’ coins. For example, you can lend your coins on platforms like AQRU for up to 12% interest. The coins are collected in what is called a liquidity pool and used for lending, borrowing and trading.
Automated Markets Markets (AMMs) need these pools to offer automated trading. Simply put, investors “lend” their tokens to pools that allow AMMs to facilitate more trades. This, in turn, increases the trading volume of the coin and increases its value.
However, how do yield farmers know how much money they are owed? DeFis issues Liquidity Provider (LP) tokens, a unique ID card that tracks how much the investor has contributed.
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The benefits of yield farming cryptocurrencies
Yield farming cryptos allow users to grow their investment while having a positive impact on a coin’s overall health. Once money is added to the liquidity pool, interest rates can even rise when demand is high. Because of this, yield farming DAI or ETH can be a good move as both coins are currently popular.
With this method of passive investing, investors can benefit from premiums, transaction fees, interest rates and price increases. And compared to mining, yield farming requires no initial investment other than the cryptos already in your wallet.
What is staking?
Compared to yield farming, cryptocurrency staking has a more “technical” purpose. Instead of increasing liquidity and offering lending services, it supports the blockchain itself.
In particular, staking is used to validate transactions on networks that use the Proof of Stake (PoS) mechanism. Proof-of-Work (PoW) blockchains are much more energy intensive and require raw computing power to create new blocks. This power is needed to solve complex math problems for a chance at a reward.
PoS relies on a completely different principle. Individual users become “validators” and set up nodes with their stakes. When the sender requests a transaction, a node is randomly chosen to verify a block and the owner of the node receives a reward.
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In this way, cryptocurrency transactions do not harm the environment. At the same time, private investors do not have to invest in expensive devices or pay high electricity bills.
While this mitigating factor is often mentioned in the yield farming vs. staking debate, there’s another catch. Setting up PoS systems requires a little more work. However, proof of fire (PoB) or third-party sources can help validate ownership and evenly distribute rewards.
From this point on, the blockchain network can continue to grow. The more stakers there are, the more secure the blockchain becomes. Staking ensures integrity, and that integrity grows exponentially with each new stake added to the system.
If the investor chooses a network that is still growing, they can passively invest in cryptocurrencies by following the growth of the network and holding the growing coin. So it’s a two-pronged approach.
The benefits of staking cryptocurrencies
First and foremost, staking allows you to earn interest on your tokens. Apps like AQRU reward investors based on which token they choose to stake. Currently, new AQRU members receive a 10 USDT bonus for joining the network. USDT and other stablecoins have an annual interest rate of 12%, while BTC and ETH yield investors 7%. AQRU has partnered with learning wallet provider Fireblocks and accepts both cryptos and fiat currencies.
Aside from monetary gains, staking is also good for the environment. As mentioned in the previous section, staking bypasses the issues that plague the PoW consensus mechanism. Therefore, everyone can become an investor and does not have to worry about electricity prices or the latest computer hardware.
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How do you know when staking is a good idea?
Instead of dealing with a bank or a government, staking cryptos involves DeFi platforms. By using smart contracts, these platforms try to facilitate financial transactions for both companies and individual platforms.
Each DeFi is based on a specific blockchain network and uses a specific standard. These two factors affect interoperability and DApp building capabilities. However, not every platform is a good choice for staking.
New investors often find this confusing, but the best way to spot a good opportunity is to look at:
1. Coin Liquidity. Best case scenario, if you provide cryptos for staking purposes, you will receive a reward in the next few minutes. Of course, this only applies to the most traded coins. However, that doesn’t mean you have to wait days or weeks. Instead, choose a coin that trades frequently or is on the rise.
2. Are the rewards worth it? Staking is risky. You give your money to an unknown platform with the promise that you will get something back. If that’s the case, make sure the rewards are worth it. Check out the competitors and ask other investors about their experiences.
3. Make sure you diversify. Would you own shares in just one company? Of course not. The same goes for staking. If you want to invest responsibly, stake multiple cryptos and only opt for the best platform available.
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Which is Better: Staking or Yield Farming?
It is always a challenge to compare two investment strategies. In the debate between yield farming and staking, investors are always looking to get their money’s worth. Of course, this has a different meaning for each person. Some investors may find staking better, others may not.
To make things easier, we decided to compare the two strategies in a number of categories. That way, you can observe their best and worst traits and make a decision.
Is staking better than yield farming?
In terms of risk, staking is often a much safer option. Yield farming is often characteristic of new DeFis, so cases of rug pulls and other types of fraud are common. Worse, many investors don’t even know how to read smart contracts properly.
Staking, on the other hand, is a much better option for beginners. PoS networks are harder to hack and require no capital investment. Of course, both yield farming and staking can suffer from coin debasement, but this is common in all crypto-related ventures.
Profitability is a different story. Some yield farming strategies can produce impressive results if investors get involved early. But early participation does not mean that the project will be successful.
Staking, on the other hand, doesn’t bring instant profits, but it doesn’t depend on early entries either. Crypto transactions always require coins to validate transactions, so deployment is increasingly geared towards longevity.
What about transaction fees? Yield farming is often a trap in this regard. Beginners will be disappointed if they want to switch to another liquidity pool. What you want as an investor is freedom, and LPs definitely suffer from walled garden syndrome. Transaction fees can also be high.
Staking does not involve gas fees or solving math problems. Maintenance and investment costs are also minimal. So you can say that Staking is better for beginners and smaller investors.
Yield Farming vs. Staking: Summary
Both staking and yield farming have their specific advantages and disadvantages. Yield farming is risky but offers short-term returns. Staking, on the other hand, is much more suitable for beginners. It’s easy to understand and doesn’t require a large initial investment. Additionally, there will always be a need for coin staking to create new nodes on the blockchain.
If you want to stake cryptos and earn a 10 USDT bonus for creating an account, join AQRU and invest like a pro!
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Disclaimer:
The above content is non-editorial and BCCL hereby disclaims all warranties, express or implied, with respect thereto and does not warrant, vouch for, or necessarily endorse the content.
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