Staking vs Yield Farming
A few months ago, we compared crypto staking to traditional saving — looking into their similarities, differences and how they work.
Now, we want to bring yield farming to the table. Similar to staking, investors participate in yield farming with the goal of generating returns. However, they mainly differ in how their processes work, as well as the risks involved.
What is Staking?
Staking involves actively participating in a blockchain network’s operations by locking up a certain amount of cryptocurrency as collateral. In turn, this collateral supports the network’s functions, such as transaction validation and security.
In return for their contribution, users receive staking rewards, typically in the form of additional tokens. Staking is commonly associated with proof-of-stake (PoS) and delegated proof-of-stake (DPoS) consensus algorithms.
Key points on Staking
- Security and Validation: Stakers contribute to the security and validation of transactions on the blockchain.
- Rewards: Users earn staking rewards, usually in the same cryptocurrency they stake with.
- Consistency: Staking rewards are generally more stable and predictable compared to other forms of passive income.
What is Yield Farming?
Yield farming involves users (known as “yield farmers”) locking up their crypto assets in liquidity pools or decentralised lending platforms to earn rewards. These rewards often come in the form of governance tokens, trading fees, or additional interest on their staked assets.
Compared to staking, yield farming is more complex. Yield farmers seek out the most lucrative opportunities across various platforms, often moving their assets frequently to maximise returns.
Key Points on Yield Farming
- Liquidity Provision: Yield farmers contribute liquidity to DeFi platforms, facilitating trading activities
- Variable Rewards: Returns in yield farming can be highly variable and depend on factors such as market demand, protocol incentives, and token prices.
- Complexity: Yield farming strategies can be intricate, involving understanding different DeFi protocols, managing investment loss, and dealing with smart contracts.
So, what makes them different?
The three key differences between staking and yield farming are:
- Participation Purpose: Stakers participate in securing and validating a blockchain, while yield farmers provide liquidity to decentralised platforms.
- Risk Profile: Staking is generally considered lower risk, especially in established PoS blockchains. Yield farming, being more dynamic and reliant on the DeFi ecosystem, carries higher risks.
- Rewards Stability: Staking rewards are more stable and predictable over time, while yield farming returns can vary widely.
Both staking and yield farming offer opportunities for crypto holders to earn passive income. The choice between them depends on individual risk tolerance, expertise, and investment goals.
Staking provides a more straightforward approach, suitable for those seeking consistent returns with lower complexity. On the other hand, yield farming appeals to users comfortable with navigating the complexities of the DeFi landscape and seeking potentially higher and more variable returns.
