Yield Farming vs. Staking: Which Passive Income Strategy Is Better?

What Is Yield Farming?

Yield farming is a method of generating cryptocurrency from your crypto holdings. It has drawn analogies to farming because it’s an innovative way to “grow your own cryptocurrency.” The process involves lending crypto assets for interest to DeFiDecentralized Finance (DeFi) takes the decentralized concept of blockchain and applies it to the world of finance. Build… platforms, who lock them up in a liquidity pool, essentially a smart contract for holding funds.

Yield Farming: Advantages

As a yield farmer, you might lend digital assets such as Dai through a DApp, such as Compound (COMP), which then lends coins to borrowers. Interest rates change depending on how high demand is. The interest earned accrues daily, and you get paid in new COMP coins, which can also appreciate in value. Compound (COMP) and Aave (AAVE) are a couple of the most popular DeFi protocols for yield farming which have helped popularize this section of the DeFi market.

What Is Staking?

Staking is the process of supporting a blockchain network and participating in transaction validation by committing your crypto assets to that network. It’s used by blockchain networks which use the proof of stake (PoS) consensus mechanism. Investors earn interest on their investments while they wait for block rewards to be released.

How DeFi Impacts Staking

DeFi stands for decentralized finance, which is an umbrella term for financial applications using blockchain networks to obviate the use of intermediaries in transactions.

  • Considering the security of the DeFi platform
  • Evaluating the liquidity of staking tokens
  • Looking into whether or not rewards are inflationary
  • Diversifying into other staking projects and platforms

Yield Farming vs. Staking: What’s the Difference?

Curious about which is better suited for the average investor when deciding between yield farming vs. staking? Yield farming is very similar to staking because both require holding some amount of crypto assets to generate profits.

Complexity

When looking at yield farming vs. staking, staking is often the simpler strategy for earning passive income, because investors simply decide on the staking pool and then lock in their crypto. Yield farming, on the other hand, can require a bit of work — as investors choose which tokens to lend and on which platform, with the possibility of continuously switching platforms or tokens.

Risk Levels

Yield farming is often practiced on newly created DeFi projects, which can be highly risky if “rug pulls” occur. This term refers to shady developers intentionally draining assets from liquidity pools.

Impermanent Loss

Yield farming exposes investors to impermanent loss due to fluctuations in prices from when the crypto was initially deposited. For example, if you deposit funds into a liquidity pool and then that crypto spikes in value, you would have been better off holding those tokens — rather than depositing them into the pool. You can also experience this loss if the crypto that you’re holding drops in value. Conversely, impermanent loss does not apply to staking.

Profitability

Wherever there’s a risk, there can also be a reward. Just as jumping off the Eiffel Tower for that adrenaline rush might not be a good trade-off — at least, not without a parachute and a good lawyer — weighing risk and reward in financial investments is critical.

Duration

For investors seeking liquidity when comparing yield farming vs. staking, the winning strategy is clear. Staking offers increased returns (or APY) when investors choose to lock in their funds for prolonged periods. Yield farming, however, doesn’t require investors to lock in their funds.

Inflation

PoS tokens are inflationary assets, and any yield paid to stakers is made up of new token supply. By staking your tokens, you can at least receive rewards in line with inflation, proportional to the amount staked. If you miss out on staking, the value of your existing holdings decreases — from inflation.

Transaction Fees

For the unaware comparing yield farming vs. staking, gas fees can certainly be a significant concern for yield farmers who are free to switch between liquidity pools, but have to pay transaction fees in the process. Yield farmers need to factor in any switching costs, even if they spot a higher return on another platform.

Security

Yield farming based on newer DeFi protocols may be more vulnerable to hackers, especially if there are glitches in a smart contract’s programming. Staking is generally more secure because stakers are participating in the underlying blockchain’s strict consensus method. Any attempt to trick the system may actually result in the perpetrators losing their staked funds.

Yield Farming vs. Staking: Which Is the Better Short-Term Investment?

For investors with a shorter time horizon and are stuck in deciding between yield farming vs. staking, both strategies have their own unique benefits.

Yield Farming vs. Staking: Which Is the Better Long-Term Investment?

You can also use yield farming and staking as longer-term strategies to earn more income from crypto.

The Bottom Line

Overall, we hope this comparison for yield farming vs. staking has been useful for you. Staking and yield farming are still relatively new passive income strategies when compared to approaches used in other financial markets. At times, the terms are used interchangeably, and staking may even be considered a subset of yield farming. Both approaches to earning passive income rely on holding crypto assets to earn rewards, and each strategy allows investors to share in the value of the decentralized financial ecosystem.

--

--

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Multiverse Capital $MVC

Multiverse Capital $MVC

You buy on BSC, we farm on multiple chains and return the profits to $MVC holders