The cryptocurrency industry and the broader decentralized finance (DeFi) sector have produced innovative financial products and services.
While one aim has been to function separately from the banking system, crypto has done an incredible job mirroring many of the same products that the conventional finance sector offers.
Case in point, yield farming and staking.
Many crypto enthusiasts have been finding ways to ensure their money is working for them rather than sitting idly in an account and waiting for another bull market to ignite a rally.
But are yield farming and staking the same thing? No.
So, in the world of cryptocurrencies, what is the difference between yield farming vs. staking anyway?
First, yield farming is when you lend your digital tokens to a decentralized exchange, also known as a DEX. The DEX offers levels of liquidity on specific trading pairs. Yield farming has been described as a worthwhile way to generate passive income on idle tokens sitting in your wallet or on an exchange – you also have access to both tokens from a trading pair, which is also a benefit.
The term stems from analogies to farming as it allows users to grow their cryptocurrency assets.
Second, staking is slightly different from farming since, in many cases, users will 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 from the energy-intensive Proof-of-Work (PoW) model that has been standard since the early days of Bitcoin.
With a yield farming pool, you do not have to agree to a minimum lock-up period and can withdraw your tokens anytime. On the other hand, with staking, your tokens are locked in a minimum of time. Some DeFi exchanges, however, do offer flexible staking terms.
Staking comes with a fixed APY, so investors know exactly how many rewards they will receive when the staking term finishes. Yield farming is more volatile, and many users will need to know what yield they will earn. That said, the odds of generating a higher yield may be superior with yield farming than staking, mainly because the risks are more significant.
For example, you only need to deposit a single token when you stake. However, with yield farming, a trading pair will be required, and it is necessary that you deposit equal amounts of each token within a pair. Still, staking does offer attractive fixed APYs.
Meanwhile, staking is more suitable for PoS coins. When you use a DEX (with yield farming), you get access to higher yields and a wider pool of supported tokens beyond PoS coins. In addition, yield farming also allows you to have a more diversified portfolio compared to staking, which is crucial in any type of market – bullish or bearish.
When evaluating the risks with both these approaches, users will compare the risk of impairment losses from yield farming and the opportunity cost of locking in tokens for staking. The other risk is that if the token’s value goes down, you will lose, whether it is a liquidity pool or a staking pool.
From additional risks to targeting high returns, both yield farming and staking can be effective strategies to earn passive income.
Yield farming is more complicated than staking as it requires more research to make profitable investments. Staking is easier to learn as you only need to select a staking pool and lock in your tokens. Put simply, yield farming requires more active management, while staking requires less effort.
Staking has no transaction costs as the funds are locked up – there is no need to switch pools – and the process maintains lower maintenance costs. At the same time, yield farming provides greater flexibility, but you have to pay transaction fees to execute any transfers and when you shift between liquidity pools.
Overall, staking and yield farming are useful and worthwhile strategies that might also come with risks. Ultimately, your option should be based on your level of investor sophistication, due diligence and necessary research, and short- and long-term investment objectives.
Indeed, the crypto ecosystem is undergoing significant changes, with industry observers expecting the sector to experience a revolution, which seems to be common every few years. Will you be a part of it, or will you wait until it is too late? Get started today at Bitbuy!