Crypto trading is becoming increasingly legal around the world, and crypto investing strategies are accordingly growing to offer a plethora of ways for enthusiasts and investors to grow their holdings and earn passive income. Two of the most popular crypto investing strategies of today are yield farming and staking. However, between yield farming vs staking, which one to pick?
In this blog, we will explore the differences, similarities, and nuances of yield farming vs staking. Whether you’re a seasoned crypto veteran or a newcomer looking to newly dive into the crypto markets, understanding these two crypto investing strategies will empower you to make informed decisions and make your crypto assets work for you.
So, let’s delve into the definitions and workings of yield farming and staking to uncover which path aligns best with your financial goals and risk appetite.
Yield farming vs staking: What is yield farming?
Yield farming, also known as liquidity mining, is a decentralized finance (DeFi) practice where investors provide liquidity to decentralized exchanges (DEXs) and lending platforms by depositing their crypto assets into smart contracts. In return, they receive rewards or interest payments, often as additional tokens.
Yield farming is similar to traditional banking practices where funds are lent to borrowers, and part of the interest becomes a reward for lenders.
Yield farming vs staking: how does yield farming work?
Here’s a step-by-step breakdown of how yield farming works:-
Select a DeFi protocol
To start yield farming, you first need to choose a DeFi protocol or platform that offers yield farming opportunities. Popular platforms include Compound, Aave, Uniswap, and Yearn.finance.
Choose a liquidity pair
Within the chosen DeFi platform, you typically select a pair of cryptocurrencies to provide liquidity for. For example, you might provide liquidity for the ETH/USDC pair, which involves locking in an equal value for Ethereum (ETH) and USDC.
Deposit your assets
Once you’ve chosen a liquidity pair, you deposit your assets into a smart contract on the platform. Your assets are used to facilitate trades, allowing users to borrow, lend, or trade the assets in the pair.
Receive LP tokens
In return for providing liquidity, you receive LP (Liquidity Provider) tokens. These tokens represent your share of the liquidity pool and entitle you to a portion of the fees generated by the protocol.
Earn rewards
Yield farming protocols often offer additional rewards in the form of governance tokens or other tokens native to the platform. These rewards are distributed to liquidity providers based on their share of the liquidity pool.
Stake or harvest rewards
Some yield farming platforms allow you to stake your LP tokens or earned rewards to earn more rewards. Staking involves locking your tokens in a smart contract for a specified period- more on that later. While some platforms may make the staking bit mandatory, others allow you to harvest your rewards at any time.
Monitor and manage
It’s essential to keep an eye on your yield farming positions and the health of the protocol. Changes in asset prices or protocol updates can impact your returns.
Withdraw and exit
When you’re ready to exit your yield farming position, you can withdraw your initial assets and any accrued rewards. Keep in mind that you may need to pay gas fees to complete the withdrawal.
Yield farming vs staking: benefits of yield farming
Between yield farming and staking, here are the advantages of the former:
High potential returns
Yield farming can offer incredibly high annual percentage yields (APYs). This makes it an attractive option for investors seeking substantial profits.
Portfolio diversification
Yield farmers can diversify their crypto holdings and mitigate risk by participating in various liquidity pools.
Active engagement
Yield farming requires active management and monitoring, making it ideal for those who enjoy actively participating in the DeFi ecosystem.
Yield farming vs staking: Risks of yield farming
On the other hand, the risks of yield farming as one of the prime crypto investing strategies include:
Impermanent loss
Liquidity providers may experience impermanent loss when the value of their staked assets fluctuates compared to holding them.
Smart contract risks
DeFi protocols rely on smart contracts, and vulnerabilities or glitches in these contracts can lead to hacks or other issues.
Market volatility
Crypto markets are known for their volatility, and rapid price fluctuations can impact the value of assets in liquidity pools.
Now that we’ve explored yield farming in depth, let’s shift our focus to another of the popular crypto investing strategies: staking.
Yield farming vs staking: what is staking?
Staking is a well-established DeFi practice that offers a secure, safe and stable way to earn passive income on your crypto assets. It is primarily associated with blockchain networks that use proof of stake (PoS) consensus mechanisms. Staking involves securing a certain amount of cryptocurrency by locking it to support network operations, such as transaction validation and block production. In return, participants receive staking rewards, often as additional tokens.
For instance, Ethereum 2.0 follows a proof of stake consensus mechanism, and requires you to stake 32 ETH minimum to participate in staking on the network.
Yield farming vs staking: how does staking work?
Between yield farming and staking, here’s how staking typically works-
Select a proof of stake network
Choose a blockchain network that supports staking, such as Ethereum 2.0, Cardano, or Polkadot.
Lock your crypto
Transfer your chosen cryptocurrency to a staking wallet or platform and follow the network’s staking instructions to lock it up.
Earn staking rewards
As you support the network by staking your crypto, you’ll receive rewards in the form of additional tokens. These rewards can vary based on the network’s policies and the amount staked.
Staking period
Some networks have minimum lock-up periods, during which you can not access your staked assets. This period can vary depending on the network.
Yield farming vs staking: benefits of staking
Between yield farming staking, the benefits of the latter are as follows:
Security
Staking is generally considered a lower-risk investment strategy than yield farming, as it does not involve complex liquidity pool dynamics.
Stability
Staking provides a stable source of passive income, making it suitable for conservative investors.
Long-term holding
Staking encourages long-term holding of cryptocurrency, which can be advantageous in a bullish market.
Yield farming vs staking: risks of staking
However, crypto staking is not without risks. Here are the disadvantages of staking:
Lock-up periods
Some staking networks have extended lock-up periods, limiting your access to your assets during market fluctuations.
Market volatility
As with any cryptocurrency investment, the value of your staked assets can be impacted by market volatility.
Yield farming vs staking: making the decision
Moment of truth: between the crypto investing strategies yield farming and staking, which one to pick? Our table below may help you make the decision.
| Yield Farming | Staking |
| Yield farming provides liquidity to decentralized platforms, depositing assets in pools for token or interest rewards. It’s an active process demanding more effort and management. | Staking entails locking cryptocurrency to support the network and earning rewards passively. |
| Yield farming aims to maximize returns through DeFi protocols, involving activities like lending, borrowing, and providing liquidity to earn high yields. | Staking secures and validates blockchain networks and supports governance, with rewards as a secondary benefit. |
| Yield farming is riskier, involving various DeFi protocols with smart contract risks, impermanent loss, and potential rug pulls. It demands thorough research and monitoring. | Staking is less risky due to established blockchains but still carries the risk of network attacks or software bugs. |
| Yield farmers enhance decentralized exchanges by adding assets to liquidity pools, boosting platform liquidity. | Staking doesn’t offer liquidity to exchanges or DeFi platforms; it bolsters network security and operations. |
| Yield farming is complex, involving steps like providing liquidity, token swaps, and managing assets across protocols, requiring familiarity with DeFi platforms. | Staking is straightforward, involving locking tokens in a wallet or contract, making it beginner-friendly. |
The choice between yield farming vs staking should be based on your risk tolerance, experience, investment goals, and level of engagement in the crypto market. However, for beginners, as we have established: staking might be the better option.
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