Staking vs Yield Farming: What’s the Difference?


Staking and yield farming generate passive income similarly. However, there are important differences. The following are the differences between yield farming and crypto staking.

There’s a reason why 16% of Americans have invested in cryptocurrency. We’ve seen the dramatic price increases that crypto has experienced just when you leave the assets alone.

But, the real profit can be gained from using these crypto assets for things like staking and yield farming for passive income.

What’s the difference between staking vs yield farming? And how does a liquidity pool and blockchain network work?

If you want to learn the answer to these questions, and more, you’re in the right place. In this guide, we’ll quickly walk you through everything you need to know about these two concepts.

Staking vs Yield Farming: What’s the Difference?

Both yield farming and staking are similar ways of generating passive income. But, there are important differences between the two. With yield farming, you deposit your crypto assets onto a DeFi platform. From there, the platforms lock them up in a liquidity pool. Liquidity pools are smart contracts used for holding crypto funds. 

Staking is when a crypto investor uses their crypto assets to support the blockchain network and keep the platform secure.

This is vital for validating both blocks and transactions that take place on the network.

 

Yield FarmingStaking
DefinitionYou yield farm cryptocurrency by lending it to an exchange. Your cryptocurrency maximizes liquidity on that exchange. Fees are paid by the exchange as a return for the loan.A stake is a way to earn interest on your cryptocurrency by depositing it for a set period of time. 
Underlying TechnologyAutomated Market MakersProof of Stake
RewardsRewards in terms of APY on the assets locked in by participants.The privilege of validating transactions in the network and rewards in native tokens.
Risks
  • Liqudation risks
  • Impermament loss
  • Smart contract risks
  • Composability risks
  • Validator risk
  • Volatility risk
  • Long waiting periods for rewards
  • Liquidity risks
  • Counterparty risks
Suitable forAdvanced usersBeginners

So, those are some of the broad-stroke differences between yield farming and staking. But, let’s take a closer look at some of the more specific differences.

Complexity

Those who are looking for a simpler way to earn passive income usually choose staking. Staking crypto requires only finding a staking pool and locking your assets.

Yield farming, on the other hand, is much more complicated. With this option, you’ll need to choose both the tokens and platforms to lend them on.

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There is also the possibility of switching either tokens or platforms midway through.

Risk Levels

When it comes to risk-level yield farming is the riskier option. This is because smart contracts can often have hidden weaknesses or bugs.

In a worst-case scenario, a rug pull can occur which is when a developer drains all the assets from the liquidity pool. Indeed, staking can also be susceptible to volatility risk.

But, there’s a much lower chance of a rug pull ever occurring when you’re staking. If you want to learn the secret to minimized risk trading, then make sure to check out Haru Earn.

Impermanent Loss

When you stake crypto there’s no risk of impermanent loss. However, with yield farming, your assets have a chance of getting locked into the liquidity pools.

When this happens impermanent loss can occur.

Profitability

Profitability for both staking and yield farming is measured by the annual percentage yield (or APY) of the returns. The profits for staking are smaller than yield farming, but they’re also more consistent.

We’re preparing an article about the difference between APR and APY. Make sure to check our blog homepage from time to time to see cryptocurrency-related valuable content.

That being said, yield farming has the potential to bring in sizable profits that completely eclipse staking.

Duration

If you’re looking for a get-rich-quick scheme, then don’t choose staking. The truth is that none of these options offer a quick way to get rich. To get maximum profits, you need to lock in your funds for prolonged periods.

However, yield farming doesn’t require you to lock up your funds for some time. As such, it’s a better short-term option.

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Inflation

The Proof of Stake assets you get from staking are 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.

Transaction Fees

Yield farmers often have to switch platforms or tokens so they can get a higher return on investment. Unfortunately, switching platforms often comes with a lot of expensive transaction fees.

Meanwhile, stakers don’t need to worry about switching costs. So, the upfront fees and maintenance costs are lower.

Security

Yield farming is a newer concept than staking. As such, it’s more susceptible to hackers. This is especially true if there are problems within the smart contract. Staking can be more secure.

Read: Cryptocurrency Hacks Continue Unabated

That’s because of the strict consensus method that comes with the blockchain. If someone tries to game the system they could end up losing their money.

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 Make 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 stand to make between 4% to 15% APY on average.

Let Haru Invest Maximize the Power 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 Investment handle it for you?

We have a variety of different products and strategies that ensure you get the highest rates on the market. Want to find out more? Download our mobile app today to start earning big.

Disclaimer

All investment strategies and investments involve risk of loss. Nothing contained in this website should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.
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