Yield Farming vs. Staking
What’s the difference between staking and yield farming? In this article, we take a closer look at the two investment strategies and examine the pros and cons.
Cryptocurrency is an emerging market with an undoubtable amount of promise to many. It houses constant innovations and changes that have the ability to impact multiple sectors. With so much happening within the space, it is often hard to keep up with everything and to similarly gauge which approaches are best for your given needs. With so many options, it's important to do your research and to know what you're doing. Within the practices of cryptocurrency investment are two notable strategies, one yield farming, and the other staking. Each has its own benefits and challenges, which will be reviewed here.
To get started with staking to earn NFTART or NFTART-BNB farming, check out this article.
What Is Yield Farming?
A yield farming strategy is a type of cryptocurrency investment that promises bigger gains than most conventional investments these days. Yield harvesting, also known as yield mining, entails the process of lending cryptocurrency.
The practice of yield farming entails taking or lending cryptocurrency in order to profit from higher returns or rewards in the form of extra cryptocurrency. New techniques like liquidity mining have made this cutting-edge yet risky and unpredictable method of decentralized finance (DeFi) extremely popular as of late.
Essentially, yield farming strategies encourage liquidity providers (LP) to stake or secure their cryptocurrency holdings in a smart contract-based liquidity pool. The incentive might be a portion of transaction fees, interest offered by lenders, or a governance token. The rate of these returns is expressed as an annual percentage yield (APY). As more investors deposit money into the associated liquidity pool, the value of the offered returns declines. In other words, as more investors contribute funds to the pool, each investor receives a smaller share of the liquidity pool. In order to receive a greater return on investment (ROI) or yield, an LP must ensure that they have sufficient capital in the pool. LPs can become a passive cryptocurrency investor by taking advantage of these higher yields. However, it is important to note that cryptocurrencies are extremely volatile. It is vital for LPs in yield farming strategies to keep in mind that their capital is at risk of being lost when investing in the cryptocurrency market.
Yield farming is vulnerable to hacks and fraud due to the protocols' smart contracts, which can be susceptible to bugs. Because of the intense competition between protocols, when time is of the essence and new contracts and features are frequently unaudited or even copied from predecessors or counterparts, these coding errors can arise.
What Is Staking?
Staking is a method of putting your cryptocurrency to use and earning reward. Staking refers to the act of committing your crypto assets to support a blockchain network and confirm transactions. It may be used with cryptocurrencies that employ the proof-of-stake model to process payments.
Staking is basically a means of earning interest on crypto assets. It's similar to putting money in a bank, in that an investor puts their funds down and receives "interest" or compensation in return. Essentially, coin holders allow their cryptocurrency to participate in the blockchain validation process and are rewarded by the network for doing so.
Staking is a very lucrative endeavor, and there is less risk involved. It's similar to mining or trading cryptocurrencies, but without as much effort or risk. To be included into the mining pool, all you have to do is buy and hold some coins. The riskiest aspect of this form of cryptocurrency approach is a potential negative price movement in the asset(s) investors are staking.
Comparing The Two
Yield farming and staking are both great ways for crypto holders to earn a passive income. The main distinction is that yield farming requires cryptocurrency funds to be placed on DeFi platforms.
The profits from yield farming are determined by the liquidity pool, which might change depending on the price of the cryptocurrency.
Yield farming also does not necessitate the user to deposit his or her funds for a set length of time.
Yield farming necessitates the implementation of an effective strategy. It's not as simple as staking, but it can bring in much bigger profits. Stake rewards are the network incentive provided to validators who assist in the blockchain's validation and generating new blocks.
Using yield farming to take a cut from the pool for free is considered less hazardous than crypto staking. That isn't to say that there aren't any dangers associated with yield farming, however. It's as they say: there is no profit without risk.
Because blockchain is inherently unchangeable, most yield farming losses are permanent and can't be recovered. As a result, it's important that consumers understand the hazards of yield farming and conduct their own study.
Staking is the act of putting your money into a blockchain to help validate transactions and blocks on the network. Staking tokens have a rigorous policy that is directly linked to the blockchain's consensus. If scammers try to deceive the system, they risk losing their money. If you stake cryptocurrency, there is also no impermanent loss. The returns from staking are predictable and sure.
Users must stake their funds for a set length of time on different distributed ledger systems. Some also impose a minimum quantity requirement. Stakers may increase their wallet value over time by earning a return on their staking efforts, however coins are locked up in a crypto wallet while staking, preventing them from trading them in the typical way.
Yield farming relates to liquidity, whereas stake ensures network security. Yield farming and staking are among the most popular techniques to create a passive revenue from your crypto assets, but they each need varying amounts of crypto expertise.
It may be tempting for farmers to choose yield farming over staking since the former is typically associated with a higher ROI when compared with the latter. However, when we dig deeper into it, there's more than meets the eye to consider.
Yield farming may be more challenging for novice cryptocurrency investors, and it needs more time and study on a daily basis. Staking crypto offers fewer rewards but does not require investor attention, and some funds can be kept locked for longer periods of time.
What should I choose?
It all boils down to the sort of investor you want to be and how much experience you have with DeFi.
As decentralized finance becomes more popular, yield farming will become more widespread. When people feel safer about investing in cryptocurrencies, they'll be more inclined to put their money into it. Making an effortless profit is always attractive, but there's no such thing when it comes to cryptocurrency. This means that the most profitable option for investors depends on how much knowledge they have about DeFi.
Yield farming is an attractive choice for investors who are just getting into this market since it allows them to earn a profit with little effort. Despite its potential, yield farming isn't free of downsides or risks. If you're not ready to take the risk, staking is the safer option between these two approaches.
A great way to keep up with all the latest developments in decentralized finance is by joining online communities. Forums are a good place to find support, advice and detailed explanations about DeFi's new features. Reddit, Twitter, Telegram and Discord are all excellent sources for staying relevant on everything related to DeFi.
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PUBLISHED 5TH JANUARY 2022
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