Yield farming vs staking
How are they different and which one is better
By Wendy’s Whitepaper contributor @LibertyRaider
Passive income strategies in crypto are evolving. No longer do we just HODL forever or think when do I sell this stuff? By participating in DeFi, we can put our crypto to work and be our own bank. We can earn from our crypto and we don’t have to sell it.
Yield farming and staking are two entirely different concepts that have different purposes. Yield farming focuses on gaining the highest yields possible, while staking focuses on securing the network and earning rewards at the same time.
Both have advantages and disadvantages, but staking is by far the safest and easiest for the beginner. So that’s where we’ll start.
What is staking?
Staking is a mechanism derived from the Proof-of-Stake consensus, an alternative to the Proof-of-Work model.
Traditionally, stakers had to set up a node on their own and join a PoS network to support them as a node validator.
Centralized and decentralized exchanges now offer users the option to stake their assets without having to deal with setting up their own node. The exchange handles the validating, while the staker just provides the assets.
Rewards can be in the same asset staked or another asset but usually not as high as yield farming.
Below we see a staking pool on Blizzard.Money
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What is yield farming?
Yield farming, also known as liquidity mining, can be challenging to understand the technical aspects even for the most experienced crypto investors. We will stick to the basic advantages and disadvantages for this article. Take a deeper dive on the technicals here.
In order to facilitate trades, decentralized exchanges rely on investors who are willing to lend assets into liquidity pools. When a yield farmer provides liquidity to a DEX like Uniswap they earn a portion of the fees.
Unlike staking, yield farmers provide a pair of tokens that are being traded in the pool and in return they receive a liquidity pool (LP) token that represents their share of the pool.
Impermanent loss happens when you provide liquidity to a pool, and the price of your deposited assets change compared to when you deposited them. Read more here.
Security vulnerabilities are another issue as they can be exploited by ‘hackers.’ If you provide liquidity to a DeFi platform and the project suffers a loss of funds, your funds could be lost forever with no way to recover them.
So, how do you decide between yield farming and staking? Your taste for risk should be the determining factor if you are confident in your skills. Otherwise, start with staking. Or maybe do a little of both. These platforms make it easy to spread it around, so you don’t have to put all your eggs in one basket.
High APY yield farming on Blizzard.Money
Yield farming offers the highest gains and the highest risk while you lend your assets to decentralized exchange pools. While staking helps secure the network and is less risky for lower gains and a little easier with fewer transactions.
If you found this helpful, feel free to follow me on Twitter @LibertyRaider or toss a few shekels in the tip jar.
Wendy’s Whitepaper Disclaimer: Please be advised that I own a diverse portfolio of cryptocurrency assets, and anything written or discussed in connection to cryptocurrencies– regardless of the subject matter’s content– may represent a potential conflict of interest. I wish to remain transparent and impartial to the cryptocurrency community at all times, and therefore, the content of my media are intended FOR GENERAL INFORMATION PURPOSES ONLY. Nothing that I write or discuss should be construed, or relied upon, as an investment, financial, legal, regulatory, accounting, tax, or similar advice. Nothing should be interpreted as a solicitation to invest in any cryptocurrency, and nothing herein should be construed as a recommendation to engage in any investment strategy or transaction. Please be advised that is in your own best interests to consult with investment, legal, tax, or similar professionals regarding any specific situations and any prospective transaction decisions.