Yield farming vs. Staking: Which Is Better?
With increased interest in cryptocurrencies recently, people are looking for alternate options to make passive income as opposed to active trading. Especially with the high level of risks involved in active trading, investors leverage other strategies to make a side income. Of all the diverse ways of earning extra income in the crypto market, the major debate is between yield farming vs. staking.
Yield farming and staking are two deFi investing strategies. DeFi means Decentralized Finance. A global financial system that’s available on blockchain networks, most often Ethereum. However, each solution offers different approaches for investors to pledge their cryptocurrencies in Dapps.
In this article, we’ll look at yield farming vs. staking, their differences to better understand which solution is best for you.
What is Yield Farming?
Yield farming, also known as liquidity mining, is a new concept that became popular in 2020 when Compound was introduced.
Yield farming is a way to earn more from your crypto assets. It involves temporarily lending tokens to others through DeFi lending protocols such as Compound, MakerDAO, or Aave. Or, you can provide liquidity directly on decentralized exchange (DEX) platforms like Uniswap and PancakeSwap.
How Does Yield Farming Work?
DeFi Yield uses smart contracts or automated market markers (AMM) to ease transactions. Here, yield farmers (LPs) add tokens to the liquidity pool for other users to lend, borrow, buy, and sell cryptocurrencies.
Because yield farming pools are competitive, they also have high yield returns on their investment.
However, do higher interest rates cover the risks and volatility of Yield farming? Maybe yes, maybe not.
Let’s look at the next: staking.
What is staking?
Similar to locking up money in a bank as “fixed-deposit”. Staking involves locking up a portion of your cryptocurrency to support a blockchain network and in return, earns interest.
Staking is a great way to use crypto to generate passive income. And also, limiting the circulation of a token increases the value of that token.
Staking uses Proof-of-Work (PoW) and Proof-of-Stake (PoS) to confirm transactions on a blockchain platform. Instead of using the energy-intensive PoW approach to cryptocurrency mining, staking uses PoS to validate transactions.
How Does Staking Work?
To get started, stakers pledge their tokens to the cryptocurrency protocol. Then the protocol randomly selects validators to confirm blocks of transactions. The more tokens you lock, the higher your chance of being selected as a validator.
Staked coins forge new blocks in the blockchain, for which that block’s validator is rewarded. Staking is only available for cryptocurrencies that use the PoS system. Bitcoin, for instance, belongs to PoW blockchain thus, cannot be staked.
However, here are some cryptocurrencies that can be staked:
To take home, staking aims to secure a blockchain network. The higher the stake, the more decentralized and secure a blockchain is.
Yield farming vs. Staking
In the previous sections, we introduced Yield farming and staking to understand how they work.
Here, we’ll look at their differences. Let’s go.
Considering both strategies, leveraging the token farm appears to be the most profitable option for passive income and can also be highly risky.
In terms of profit-making, Yield farming is not as straightforward as staking. But yield rates on LPs can go higher than 100%. On the other hand, staking rewards (APY) range between 5% — 15% depending on the staking token.
Considering the risk levels yield farming is highly vulnerable to “Rug pulls” and hackers. “Rug pulls” happens when the developers of a project will shut down the project and disappear with the funds. But when it comes to staking, this can be managed. Staking follows strict policies thus, Rug pulls are less likely to occur.
Unlike yield farming, staking allows investors to lock in their tokens for a prolonged time for increased returns (or APY).
Now that you’ve seen that both strategies are not the same. Yield farming aims to garner the highest profit ever, while staking provides security for blockchain networks while earning rewards too.
WHICH IS BETTER?
Choosing the best option for passive income between yield farming and staking balls down to your knowledge of crypto, your take on risks, and goals.
If you’re a newbie, Staking would do because it requires less attention once funds have been locked in.
However, if you’re confident in your skills and your goal is to make side income in a short period, then yield farming is the go option. Otherwise joining a staking pool or a blockchain that doesn’t enforce timelocks would be better.