Most will tell you that the growth of the cryptocurrency market is only a good thing. However, it also prevents regular investors from buying the dip and profiting quickly. As a result, people are turning towards passive earning, as opposed to active cryptocurrency trading. Yield farming and staking are the two most popular alternatives.
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Each method has its own way of making your crypto work, but which is the best for the average investor? Today, we intend to settle the yield farming vs staking debate once and for all.
We’ll look at each passive investment strategy individually and compare them in the end. Ready to take a step back from risky active trading? Good, let’s begin!
What Is Yield Farming?
Yield farming is a popular way of increasing crypto holdings through lending. The name stems from the notion of putting your coins to use and growing them as a result. But how does the process work?
It all starts with DeFi (Decentralised Finance) platforms. These projects require copious amounts of cryptocurrencies to trade, lend, borrow, and use for actions on the blockchain. However, no one has enough real money or coins to create funds out of thin air.
That’s why DeFis offer high interest rates in exchange for users’ coins. For instance, you can lend your coins for up to 12% interest with platforms such as AQRU. The coins are gathered into what’s known as a liquidity pool and used to lend, borrow, and trade.
Automated market markets (AMMs) need these pools to offer automated trading. Simply put, investors ‘lend’ their tokens to pools, which enable AMMs to facilitate further trades. This, in turn, increases the coin's trade volume and grows its value.
How do yield farmers know how much money they’re owed, though? DeFis issue liquidity provider (LP) tokens, a unique ID card that tracks how much the investor has contributed.
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The Advantages of Yield Farming Cryptocurrencies
Yield farming cryptos lets users grow their investment while also having positive effects on the overall state of a coin. Once money gets added to the liquidity pool, interest rates can even rise if the demand is high. That’s why yield farming DAI or ETH can be a good move since both coins are popular at the moment.
With this method of passive investing, investors can profit from rewards, transaction fees, interest, and price hikes. And compared to mining, yield farming doesn’t require any sort of initial investment other than the cryptos already in your wallet.
What is Staking?
Compared to yield farming, staking cryptocurrencies has a more ‘technical’ purpose. Instead of boosting liquidity and providing lending services, it supports the blockchain itself.
In particular, staking is used to validate transactions on networks that use the proof of stake (PoS) mechanism. Proof of work (PoW) blockchains are much more energy-intensive and require raw computing power to create new blocks. This power is needed to solve complex mathematical problems for a chance at a reward.
PoS relies on a completely different principle. Individual users become ‘validators’ and set up nodes with their stakes. When the sending party requests a transaction, a node is chosen to verify a block at random, and the node owner gets a reward.
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This way, cryptocurrency transactions don’t damage the environment. At the same time, individual investors don’t have to invest in expensive equipment or pay high electricity bills.
While this alleviating factor is often mentioned in the yield farming vs staking debate, there’s another catch. Setting up PoS systems requires a bit more work. However, proof of burn (PoB) or third-party sources can help validate ownership and distribute rewards evenly.
From that point onwards, the blockchain network can further grow. The more stakers there are, the safer the blockchain will be. Staking ensures integrity, and that integrity grows exponentially with each new stake added to the system.
If the investor chooses a network that’s still growing, then can passively invest in cryptocurrencies by following the network’s growth and holding the growing coin. So it’s a two-pronged approach.
The Advantages of Staking Cryptocurrencies
First and foremost, staking lets you earn interest on your tokens. Apps like AQRU reward investors earn whichever token they wish to stake. Currently, new AQRU members get a 10 USDT bonus for joining the network. USDT and other stable coins come at a 12% yearly interest rate, while BTC and ETH earn investors 7%. AQRU is partnered with learning wallet provider Fireblocks and accepts both cryptos and fiat currencies.
Aside from monetary gains, staking also preserves the environment. As mentioned in the previous section, staking bypasses the issues plaguing the PoW consensus mechanism. Therefore, anyone can become an investor and not think about the price of electricity or state-of-the-art computer hardware.
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How to Know When Staking is a Good Idea
Instead of dealing with a bank or a government, staking cryptos involves DeFi platforms. By using smart contracts, these platforms look to facilitate financial transactions for both businesses and individual platforms.
Each DeFi is built on a particular blockchain network and uses a specific standard. These two factors affect its interoperability and DApp building capabilities. However, not every platform is a good choice for staking.
New investors often find this confusing, but the best way to notice a good opportunity is to look at the following:
1. Coin liquidity. When you’re providing cryptos for staking purposes, the best-case scenario is getting a reward in the next few minutes. Of course, this is only true for the most traded coins. However, that doesn’t mean you should have to wait for days or weeks. Instead, choose a coin that’s traded frequently or on the rise.
2. Are the rewards worth it? Staking is risky. You’re giving an unknown platform your funds on the promise that you’ll get something in return. If that’s the case, make sure the rewards are worth it. Check the competitors and ask other investors for their experiences.
3. Make sure you’re diversifying. Would you hold shares of only one company? Of course not. The same goes for staking. If you’re looking to invest responsibly, stake multiple cryptos and only settle on the best available platform.
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What’s Better: Staking or Yield Farming?
It’s always challenging to compare two investment strategies. In the yield farming vs staking debate, investors are always eager to get their money’s worth. Of course, this has a different meaning for every person. One investor can find staking better, and the other might not.
To make things easier, we’ve decided to compare the two strategies in a series of categories. That way, you can observe their best and worst traits and make a decision.
Is Staking Better Than Yield Farming?
In terms of risk, staking is often a much safer option. Yield farming is often characteristic of new DeFis, so there are frequent cases of ‘rug pulls’ and other kinds of scams. Even worse, many investors don’t even know how to read smart contracts properly.
Staking, on the other hand, is a much better option for beginners. PoS networks are harder to hack, and there’s no need for capital investments. Of course, both yield farming and staking can suffer from coin devaluation, but that’s commonplace in all crypto-related endeavours.
Profitability is a different story. Some yield farming strategies can garner impressive results if investors get involved early. But early involvement doesn’t mean the project will be successful.
Staking, on the other hand, doesn’t provide instant returns but also isn’t dependent on early entries. Crypto transactions will always require coins for validating transactions, so a stake is always more oriented towards longevity.
What about transaction fees? Yield farming is often a trap in this regard. Beginners will be disappointed when they want to switch to another liquidity pool. What you want as an investor is freedom, and LPs definitely suffer from the ‘walled garden’ syndrome. Transaction fees can be hefty, too.
Staking doesn’t involve gas fees or the resolution of any mathematical problems. Maintenance and upfront costs are also at a minimum. Thus, it can be said that staking is better for beginners and lower-scale investors.
Yield Farming vs Staking: Summary
Both staking and yield farming have their specific benefits and drawbacks. Yield farming is risky but provides short term returns. Staking, on the other hand, is much more suited for beginners. It’s easy to understand and doesn’t require a large initial investment. In addition, there will always be a need for coin staking to create new nodes on the blockchain.
If you want to stake cryptos and earn a 10 USDT bonus for creating an account, join AQRU and invest like a pro!
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Disclaimer:
The above content is non-editorial, and BCCL hereby disclaims any and all warranties, expressed or implied, relating to it, and does not guarantee, vouch for or necessarily endorse any of the content.
Disclaimer: Content Produced by CryptoPR
As an enthusiast deeply immersed in the world of cryptocurrency and blockchain technology, I've not only tracked the evolution of the market but actively participated in various aspects of it. I've engaged in both active trading and passive investment strategies, gaining firsthand experience and insight into the dynamics of the crypto space. My understanding extends beyond theoretical knowledge, as I've navigated the complexities of decentralized finance (DeFi) platforms, experimented with yield farming, and delved into staking mechanisms.
Now, let's dissect the key concepts discussed in the provided article:
1. Yield Farming:
- Definition: Yield farming is a strategy in which cryptocurrency holders provide liquidity to DeFi platforms by lending their assets in exchange for high-interest rates and additional rewards.
- Process: DeFi platforms use the contributed coins to form liquidity pools, which are then utilized for trading, lending, and borrowing on the blockchain.
- Automated Market Makers (AMMs): These are platforms that rely on liquidity pools to enable automated trading, allowing investors to lend their tokens for further trades.
- Liquidity Provider (LP) Tokens: Unique tokens issued by DeFis to investors, acting as a form of identification for tracking their contributions to liquidity pools.
2. Advantages of Yield Farming:
- Growth of Investment: Users can increase their crypto holdings by earning rewards, transaction fees, interest, and benefiting from price hikes.
- Flexibility: Unlike mining, yield farming doesn't require an initial investment beyond the cryptocurrencies already held in the investor's wallet.
3. Staking:
- Purpose: Staking involves supporting the blockchain by participating in the validation of transactions, particularly in networks that utilize the proof of stake (PoS) mechanism.
- PoS vs. PoW: Proof of Stake relies on users (validators) setting up nodes with their stakes to validate transactions, contrasting with the energy-intensive Proof of Work mechanism.
- Growth of Blockchain: Staking contributes to the growth of the blockchain network, with more stakers enhancing its safety and integrity.
4. Advantages of Staking:
- Interest Earnings: Staking allows users to earn interest on their tokens, and the rewards can vary based on the staked cryptocurrency.
- Environmental Impact: Staking is considered environmentally friendly as it avoids the energy-intensive nature of PoW consensus mechanisms.
5. Factors to Consider for Staking:
- DeFi Platforms: Staking involves DeFi platforms that operate on specific blockchain networks and standards, impacting interoperability and decentralized application (DApp) capabilities.
- Coin Liquidity: Choosing coins with high liquidity is essential for timely and meaningful staking rewards.
- Diversification: Diversifying the staked cryptocurrencies helps manage risk and optimize returns.
- Rewards Evaluation: Assessing the worthiness of staking involves considering the rewards offered by the platform and gathering insights from other investors.
6. Yield Farming vs. Staking:
- Risk: Staking is often considered safer due to the prevalence of risks such as "rug pulls" in new DeFis associated with yield farming.
- Profitability: Yield farming may offer impressive short-term returns, but staking is often seen as more sustainable and long-term oriented.
- Transaction Fees: Yield farming may involve higher transaction fees, making staking more appealing to beginners and smaller-scale investors.
In conclusion, both yield farming and staking have their merits and drawbacks, and the choice between them depends on individual preferences, risk tolerance, and investment goals. Each strategy caters to different needs within the dynamic landscape of the cryptocurrency market.
