Earning Passive Income in Crypto: Yield Farming vs. Staking Compared
Many cryptocurrency investors want to increase their earnings with passive income. There are now new options for decentralised finance (DeFi) apps to give customers more money. Staking and yield farming are two popular methods. But how do they differ, and which one makes more money? This article will explain.
You’ll need to put your assets into a pool to make money as a liquidity provider. These assets are then used for things like lending to other users. In exchange for doing this, you’ll earn a portion of the fees from transactions, tokens, interest, and any asset value increase. The more assets you put into the pool, the more you can earn.
What is Yield Farming ?
Yield farming is a fascinating way to grow cryptocurrency holdings by participating in decentralized applications, often called DApps. It’s like how you might earn interest on your money in a regular bank but with a unique twist in cryptocurrency.
The lion’s share of rewards typically goes to large, established institutions in traditional finance. However, things work differently in the decentralized finance (DeFi) ecosystem. DeFi projects compete with one another by offering more modest slices of rewards to users who are willing to lend their digital assets.
At its core, yield farming offers crypto enthusiasts a chance to earn rewards on the assets they deposit rather than just holding onto them passively. It’s an entrepreneurial approach to making the most out of your crypto holdings. These projects incentivize users by rewarding them for temporarily utilizing their assets. This practice serves a dual purpose: it bolsters the liquidity of these projects, making it easier for assets to be traded quickly and efficiently, and it enables users to maximize their returns on their holdings.
Liquidity, in the context of financial markets, is a critical attribute as it ensures swift and efficient transactions. Simply put, the more liquid a market is, the easier and faster it is to buy or sell assets. Yield farming is a strategic maneuver that enhances liquidity within the crypto space. New projects can give their liquidity a kickstart by offering attractive incentives to users, and established projects experiencing a decrease in liquidity can reverse this trend by doing the same.
So, yield farming isn’t just a way to earn rewards on your crypto assets; it’s a dynamic approach that benefits both users and projects, fostering growth and liquidity in the decentralized finance space.
Benefits of Yield Farming
Here are the advantages of yield farming and staking:
- Higher Potential Profit: Yield farming can be more profitable than staking, with returns sometimes reaching up to 100%. However, it comes with higher complexity and risk.
- Active Management: Yield farming requires active involvement. Investors need to adjust their tokens based on market trends and switch platforms for optimal returns.
- Flexibility: Unlike staking, yield farming doesn’t lock up your funds, allowing you to withdraw your money at any time.
Yield Farming Platforms
Compound: Compound is a DeFi platform on Ethereum where you can try yield farming. By becoming a liquidity provider, you earn rewards in the form of cryptocurrencies you add to the liquidity pool and receive COMP tokens, which you can trade or use for governance.
PancakeSwap: This decentralized exchange (DEX) operates on the Binance Smart Chain (BSC) and offers yield farming opportunities. When you provide liquidity, you can earn CAKE tokens based on the tokens you add to the pool and the annual percentage rate (APR) for yield farming.
What is Staking?
Staking involves locking tokens within a network that operates on a proof-of-stake (PoS) consensus mechanism, examples of which include Ethereum, Solana, Cardano, and others. Its primary purpose is to guarantee the verification and security of all transactions conducted on the network. In simpler terms, staking resembles the concept of time deposits, where an investor’s assets are committed for a specific duration. However, it’s worth noting that certain staking services offer the flexibility for users to withdraw their funds at any time.
Staking is like saving your cryptocurrency to help keep the blockchain secure. In exchange, you earn interest on your staked assets every day. The exact amount of interest you receive varies depending on the specific cryptocurrency you’re staking.
Benefits of Staking
- Steady Returns: Staking offers Annual Percentage Yields (APY) ranging from 5-14%, providing a stable and predictable income. The APY remains fixed throughout the staking period.
- Passive Management: Staking is more straightforward and passive. Investors simply choose a network, stake their assets, and receive returns without active adjustments.
Ethereum: Following The Merge update, Ethereum became proof-of-stake (PoS), allowing you to stake your ETH. With the Shapella update, you can withdraw your ETH at any time. You can stake your ETH through various methods, including using a staking service, becoming a validator, or utilizing the Liquid Staking Derivatives (LSD) platform.
Solana: Like Ethereum, Solana operates as a PoS network and offers staking services. By locking in your SOL assets, you can earn an annual percentage yield (APY) of up to 7%. You only need to select a wallet or platform that provides Solana staking services.
How DeFi Impacts Staking
- Increased demand for staking tokens: DeFi projects often require tokens to participate, increasing their prices and making staking more attractive.
- Liquidity provision: Staking is an alternative to liquidity provision, where users lock up their assets to secure a network or participate in governance.
- Yield farming with staked tokens: Some DeFi platforms allow users to stake their staked tokens in liquidity pools or yield farming strategies, leading to double-dipping on rewards.
- Incorporating staking into DeFi protocols: DeFi projects are starting to integrate staking mechanisms, allowing users to stake their assets as collateral.
- Governance and decision-making: Staking governance tokens can increase one’s voting power, giving stakeholders a stronger voice in shaping the direction of a DeFi project.
- Staking as security: In some DeFi projects, staked tokens can be slashed or confiscated if malicious activity is detected, helping to deter bad actors.
- Competition for liquidity: As staking becomes more popular, it can divert liquidity away from DeFi platforms, making it more challenging for them to offer competitive yields.
Overall, DeFi can positively impact staking by increasing the demand for staking tokens, creating new opportunities to earn rewards, and integrating staking into DeFi protocols. However, it is essential to note that DeFi and staking are dynamic sectors, and their interaction continues to evolve.
Yield Farming vs Staking: What’s the Difference?
Many crypto investors favor passive income to boost their profits. With the growth of decentralized applications (dApps) in the crypto world, there are now various ways for decentralized finance (DeFi) apps to provide returns to users. Among these options, yield farming and staking remain popular choices. But what sets them apart, and which one is more profitable? Explore these questions in the upcoming article.
🚧 Mechanism: Yield farming is more intricate than staking. Investors must select which tokens to lend and on which platform, potentially switching between platforms or tokens. In contrast, staking only requires choosing a platform, and rewards are received daily.
⚠️ Risks: Yield farming carries more risk, including impermanent loss, price swings, smart contract vulnerabilities, and rug pulls. Staking risks are primarily limited to price fluctuations and blockchain security breaches.
💸 Profit: Yield farming offers a higher potential return, potentially reaching up to 100%. Staking, however, typically yields around 5-14%.
The Time Horizon
Regarding how long you want to invest, yield farming and staking differ.
Yield Farming: This is quite flexible because there’s no need to lock up your money. You can withdraw your funds whenever you like. This means you might make more money quickly with yield farming if you have the right strategy and timing.
Staking: With staking, you get daily returns, which is excellent for short-term gains. But if you’re thinking long-term, you can make even more, especially if you plan to hold onto your tokens. Keeping them for a while can also help protect you from daily price ups and downs.
In short, yield farming is flexible and can make money quickly, while staking can be better for the long haul if you’re patient.
Defi staking vs. Yield Farming: Which Is the Better Short-Term Investment?
DeFi Staking: If you prioritize stability, predictability, and lower risk in the short term, DeFi staking may be the better choice. It’s well-suited for consistent, albeit potentially lower, returns.
Yield Farming: It could be a more attractive option if you’re willing to take on higher risk for the possibility of higher short-term gains and are comfortable with the complexities and risks associated with yield farming.
Conclusion: Time Matters
Time plays a crucial role in cryptocurrency investments, and yield farming and staking offer different approaches.
Yield Farming: It’s like a flexible savings account. You can deposit and withdraw your funds anytime, making quick profits with the right strategy.
Staking: This is more like a long-term investment. You earn daily returns and can maximize your gains if you’re patient and hold onto your tokens.
In summary, yield farming is the way to go if you’re looking for quick gains. But staking can be a better choice for a more secure, long-term investment. The key is understanding your goals and your willing time to commit.