In the decentralized finance space, there are two primary ways to earn rewards for participating in a network: yield farming and staking. Both of these methods involve holding crypto assets in order to earn rewards, but they differ in how those rewards are earned.
The two are often confused, but there are some important differences between them, and it can be helpful to understand these differences before investing. Let’s find out the differences between yield farming and staking rewards.
Yield Farming vs Staking
Yield farming and staking crypto are both ways for investors to generate passive income from cryptocurrencies. However, yield farming can generate higher returns with more risk compared to staking crypto.
In yield farming, users provide liquidity to a platform and receive rewards in the form of tokens from other crypto projects issued on the same platform. Meanwhile, in staking, users lock up their crypto assets into a blockchain to validate transactions and vote on protocol changes. They are then rewarded with rewards depending on the amount of cryptocurrency locked up as well as network fees collected by the user’s nodes.
Ultimately, which method is used depends on each investor’s individual financial objectives and risk tolerance.
How do yield farming platforms use crypto assets to generate profit?
Yield farming platforms use crypto assets and smart contracts to attain high returns over short periods. Through automated strategies like liquidity pooling, investors are able to earn rewards by simply holding their tokens in a specific platform. Among other strategies, yield farming also involves lending and borrowing crypto assets, creating derivative products and providing liquidity for certain blockchain protocols.
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These mechanisms allow investors to generate profits without actually owning the underlying asset, thus creating a new way of making money utilizing existing digital assets. Companies that leverage yield farming platforms can also benefit from a higher ROI than traditional investment methods, making them an attractive option for many businesses and individuals.
Example yield farming platforms
AAVE, Compound, and SushiSwap are examples of yield farming platforms. Through lending and staking, all of these decentralized finance platforms allow crypto rewards to be earned. Users pay the transaction gas fee and platform fees while harvesting their yield farming rewards.
Deposit periods
There is no lock-up period in yield farming. In order to maximize their earnings, yield farmers can move their assets between liquidity pools at any time.
The fund can’t be moved during the lock-up period of staked coins. Users can use this option if they do not wish to actively manage their funds and trust the network.
Transaction fees
Active management is necessary for yield farming, and active management means more transactions. The Ethereum network has high gas fees, which can be annoying. To calculate earning rates properly, transaction fees for each action must also be calculated.
Staking does not require active management. As a result, fewer transactions will take place, gas fees will be lower, and calculations will be simpler.
Token requirements
To provide liquidity to liquidity pools, yield farmers need to choose a pair of tokens, such as ETH-BNB and BTC-USDT.
A lock-up period and one token are all that are needed for staking.
Profit range
Yield farming returns are hard to calculate since they aren’t static. It’s dynamic and changes continuously according to market conditions. Most of the time, yield farming offers a higher return than staking, even if it is risky. The rates aren’t fixed in yield farming.
Staking offers fixed APY, so users know what they’ll earn at the end of the staking period.
Risks
Yield farming involves development bugs, smart contract errors, hacking vulnerabilities, and rug pulls and is considered riskier than staking.
Staking involves validator, volatility, liquidity, and counterparty risks.
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Inflation
The Proof of Stake assets you get from staking is inflationary assets. As such, any yields you get come from a new supply of tokens. That means that you will receive profits that are in line with what you staked regardless of inflation. Inflation with yield farming, on the other hand, decreases the value of your holdings.
Impermanent loss
When the value varies between when they were first deposited and now, the difference is called impermanent loss.
There’s no impermanent loss risk in staking.
Security
The concept of yield farming is newer than the concept of staking. As a result, it’s more vulnerable to hackers. This is especially true if there are problems with the smart contract. Yield farming also involves crypto lending, which is a red flag for most people. Because of these reasons, staking is considered to be a more secure option most of the time.
Read: Cryptocurrency Hacks Continue Unabated
Which Is Better Yield Farming or Staking Crypto?
Ultimately, there isn’t an easy answer to this question. That’s because the better option for you depends on your investment needs. At first glance, the high ROI potential of yield farming might make it a more attractive option for certain people.
But, it’s important to remember that this method requires a lot of time and research to do right. It can be both confusing and risky. Staking, on the other hand, is a much more hands-off version of investing in cryptocurrency.
Yes, it won’t generate the same rewards, but it’s also much safer. So, it depends on your investment situation.
How Much Can You Earn With Yield Farming vs Staking?
Earlier, we briefly mentioned that you stand to gain potentially higher APYs yield farming if you have a winning strategy. But, exactly how much do you stand to gain?
With yield farming, returns can be as low as 1% or as high as 1,000% APY. Staking, on the other hand, is more consistent but less profitable. With this option, you can make between 4% to 15% APY on average.
Let Haru Invest Maximize the Profitability of Your Crypto Assets
We hope this guide helped you learn the difference between staking vs yield farming. If you don’t have much experience with either of these strategies, it can be intimidating to choose the right one.
So, why not let the experts over at Haru Invest handle it for you?
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