As of August 2023, the global market capitalization of cryptocurrencies was about $1.09 trillion USD. In such a conducive scenario, everybody was naturally keen to engage in crypto trading, but not all had the time or expertise. Enter crypto staking and yield farming.
These concepts allow investors to earn crypto passive income. These methods are beginner friendly and allow investors to earn crypto without spending a significant time of their lives understanding cryptos.
Let’s understand how crypto staking and yield farming work, and how they help you earn crypto wealth.
What is crypto staking?
Crypto staking is a procedure in which crypto holders participate in the validation and verification of transactions on a blockchain by locking up a specific amount of their digital assets. This involves contributing to the security and functionality of the network.
In return for staking their coins or tokens, participants receive staking rewards, similar to earning interest or dividends.
Staking is commonly associated with Proof of Stake (PoS) blockchain consensus mechanisms, where validators are chosen to create new blocks and secure the chain based on the amount of crypto they hold and are willing to “stake” as collateral.
Staking provides a way for users to earn crypto passive income while actively supporting and strengthening the underlying blockchain network.
Here’s why crypto staking is worth considering:
- Staking rewards: By staking your crypto, you become part of the network’s operations. In return, you earn staking rewards. This is akin to receiving dividends on your investment.
- Proof of stake (PoS): Staking is often associated with PoS blockchains. This means you’re helping to secure the network and validate transactions, contributing to the network’s stability and trustworthiness.
- Annual percentage yields (APY): The Annual Percentage Yield in staking is attractive, often surpassing traditional savings accounts. It’s a fantastic way to grow your crypto assets over time.
- Low entry barrier: Staking is beginner-friendly. You don’t need a Ph.D. in blockchain to get started. It’s as simple as holding your crypto in a compatible wallet.
- Participation in network governance: Some staking protocols give stakers a say in network decisions. It’s like having a voice in the future of the blockchain you support.
The longer you stake, the more rewards you can accumulate. It’s like putting your money in a high-profit savings account, only with crypto.
Back to comparing crypto staking and yield farming, it is time to understand the latter.
What is yield farming?
Yield farming, also known as liquidity mining, is a decentralized finance (DeFi) practice where cryptocurrency holders provide liquidity to various DeFi protocols by lending or staking their assets in smart contracts.
In return for contributing liquidity, participants receive rewards in the form of additional tokens- often the native tokens of the DeFi projects they are supporting.
Yield farming allows users to maximize returns on their crypto holdings by actively participating in decentralized ecosystems. Participants allocate their funds to different liquidity pools, optimizing their exposure to various DeFi projects and aiming to capture higher yields. It is a way for users to earn crypto passive income while actively engaging in the decentralized financial landscape.
Yield farming can involve risks and requires careful consideration of the associated rewards and potential volatility.
Here’s why it’s a thrilling venture for beginners:
- Crypto passive income galore: Just like staking, yield farming lets you earn crypto passive income. Your crypto works for you while you go about your daily life.
- Diversification: Yield farming allows you to diversify your crypto holdings by participating in various DeFi projects. It’s like planting different crops on your crypto farm, reducing risk.
- Involvement in DeFi: DeFi is revolutionizing finance by cutting out intermediaries. Yield farming is your ticket to being part of this financial revolution.
- High earning potential: Some DeFi platforms offer astronomical annual percentage yields, making yield farming attractive for those seeking substantial investment returns.
Differences between crypto staking and yield farming
Now that you have a basic understanding of both concepts, let’s understand the differences between crypto staking and yield farming so you can find out which one suits your needs better:
| Attribute | Yield Farming | Crypto staking |
| Crypto returns and volatility | Yield farming can potentially offer higher returns, but they come with greater volatility and uncertainty. | Staking tends to offer more stable and predictable returns, usually in the form of staking rewards or a share of transaction fees. These returns are often lower but less volatile. |
| Functions performed | Yield farming often requires providing liquidity to DeFi platforms, which can help improve the efficiency of decentralized markets. | Staking focuses on securing the blockchain and earning ensuing rewards. |
| Degree of management required | Yield farming can provide higher returns but may require more active management, as opportunities and rewards can change rapidly. | Staking rewards are generally earned continuously without much management needed, providing a steady income stream. |
| Security | The security measures are continuously improving in yield farming, to overcome the vulnerabilities in DeFi. | Staking is generally considered more secure, as it involves supporting established blockchain networks with smart contract security and decentralization. |
| Scope | Yield Farming primarily focuses on generating returns through liquidity provision and trading. | Staking protocols grant stakers the ability to participate in network governance, allowing them to vote on proposals and decisions related to the blockchain’s future. |
Conclusion
As a beginner, crypto staking and yield farming both can be your gateway to earning crypto wealth. They offer a chance to grow your crypto holdings, earn crypto passive income, and actively participate in the evolving crypto landscape. Just remember that while the rewards can be enticing, risks are involved, so it’s essential to do your research and proceed cautiously.
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