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Yield Farming vs. Staking: Which Is Better?

It’s not a secret anymore: decentralized finance has flourished in the past 2 years. For investors of any investment capital size, DeFi presents numerous passive revenue-generating opportunities. Yield farming vs. staking– two of the biggest earning options– which one to go for?

Source: Freepik

As of January 2022, a mind-giggling $92 billion of value is locked in DeFi-based protocols. The same sources also mention that DeFi’s growth on the Ethreum Network has gone over 700% in 2021 alone. And the end of this growth doesn’t appear in the horizon.

In this article, we will go through what DeFi staking and yield farming mean and how they work. We will also go through their main differences and (*clears throat*), how you can profit from them.

What decentralized finance (DeFi) actually means

Decentralized finance (DeFi) is an evolving financial technology in the blockchain space that relies on distributed ledgers– same as cryptocurrencies. The model aims to remove the control banks have traditionally had on money, as well as financial products and services.

DeFi enables individuals, traders, and companies to perform independent financial transactions through blockchain technology, ending the need for an intermediary. This is achieved through peer-to-peer (P2P) networks that utilize security systems, connectivity, as well as enhanced software and hardwares.

Two great ways investors are able to take advantage of DeFi are staking and yield farming.

What is Yield Farming?

Yield farming, also known as liquidity mining, is a great way to make profits from crypto assets. In some ways, yield farming is a different level of “high risk, high reward” version of staking.

By using the power of smart contracts, DeFi Yield farming involves lending funds to others, and earning generous reward fees in return. The rewards are usually dispersed in the form of the same DeFi token through a formula known as an annual percentage yield, or APY. As more investors take part in the same liquidity pool, the APY rate decreases.

Yield farming is a competitive area of DeFi, where farmers are constantly competing for the best yield from the token farm.

Source: CryptoNewsFlash

What is Staking?

Staking has been the favorite feature for investors to make the most out of their crypto assets. To “stake” your assets means you will earn a rate of percentage rewad over time. This is enabled through a “staking pool,” which can be compared to a traditional interest-rewarding savings account (just with a way higher rewards rate).

The reason why you receive rewards while staking your tokens is because the blockchain puts the tokens to use. To do so, the system uses a “Proof of Stake,” a consensus mechanism that ensures the verification and security of transactions without a bank or other intermediary. If you decided to participate in a staking pool, your cryptocurrencis start to contribute to the same process.

Usually, the larger amount of crypto assets an investor stakes, the higher chances of getting chosen as the next block validator.

Yield farming vs staking: which one to go for?

The risk adrenaline and crypto knowledge are usually the determining factors when deciding between farming or staking crypto assets. Overall, hopefully this brief guide on yield farming vs. staking has assisted you in making an informative decision.

Staking and farming are still fairly new passive income models compared to traditional models of financial institutions. The terms are closely related to each other, with staking often seen as a branch of yield farming. Each strategy involves holding cryptocurrencies to earn rewards, and allows investors to take advantage of the value of DeFi ecosystem.

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Hekuran Gashi

A modern-day nerd who likes reading, boxing, and yeah, cartoons. Hekuran writes about Web 3.0, Gaming, NFTs, and Metaverse projects.