Yield Farming Vs Staking in Crypto: What's The Difference

The rise in the popularity of crypto has seen people looking to While cryptocurrency trading remains one of the most popular ways to potentially earn returns in the space, not everyone is drawn to the idea. Luckily for this group of people, there are other ways that they can potentially profit from the crypto space. One of these ways is through earning crypto passive income. In this article, we’ll be taking a look at yield farming and staking, both of which are crypto passive income strategies, and explaining what they are and their differences.

What Is Yield Farming In Crypto

Yield Farming or YF is a crypto passive income strategy whereby users temporarily lend their crypto assets to DeFi protocols such as Decentralized Exchanges (DEXs) and liquidity pools to earn yields on their crypto, typically on a weekly or daily basis. Users who participate in yield farming are called yield farmers. Yield farmers can determine how long they want to lend their crypto; it can last from as short as a couple of days to as long as a couple of months.

How Does Yield Farming Work?

In the yield farming process, yield farmers lend their crypto assets to DeFi protocols. These assets are then locked into a smart contract-based liquidity pool of the DeFi protocol where they are used to facilitate trading, lending and borrowing. In exchange for their locked assets, yield farmers earn compensation in the form of an annual percentage yield (APY).

In centralized finance terms, yield farming is similar to earning interest on the funds you deposited into your bank account. The banks pay you a fixed interest rate for using your funds to provide loans to others.

What Is Staking In Crypto

Staking is also a crypto passive income strategy whereby users can earn staking rewards by locking their crypto assets to secure Proof of Stake blockchain networks. Staking usually involves a lock-up period, where users cannot trade or withdraw their coins. Lock-up periods differ based on the blockchain network or platform you stake and the period can range from one week to a month or longer.

How Does Staking Work?

Staking is derived from the Proof of Stake consensus mechanism, an alternative to the Proof of Work model where users mine cryptocurrencies. Instead of consuming huge amounts of energy and computational power to solve complex mathematical problems to verify transactions, users stake their assets to act as validators and verify blocks. By staking their assets, validators have financial interests in maintaining the integrity of the network, thus reducing the likelihood of malicious actions.

Ethereum, one of the more well-known blockchain networks, transitioned from a Proof of Work to a Proof of Stake consensus mechanism. The new Ethereum 2.0 network requires users to stake at least 32 ETH to become a validator. In return for staking their assets and validating transactions, users receive staking rewards in the form of gas fees.

Yield Farming Vs Staking In Crypto: What’s The Difference?

While yield farming and staking offer users ways to earn crypto passive income, they differ in several ways.

Deposit Periods

For yield farming, users do not need to lock their crypto in a liquidity pool to earn rewards. They can withdraw their crypto assets freely and provide liquidity to other liquidity pools which can offer them higher Annual Percentage Yields (APYs). Staking, on the other hand, typically has a lock-up period in which users cannot withdraw their crypto.

Transaction Fees

As yield farmers typically move their crypto from one liquidity pool to another in search of higher yields, they have to pay transaction fees when switching between liquidity pools. These transaction fees can add up, especially during periods of high congestion on the networks where users might have to pay prohibitively high gas fees to conduct their transactions. For staking, since users’ assets are locked up, they do not incur transaction costs.

Potential Profits

To attract liquidity, liquidity pools tend to compete with one another to offer the most lucrative APYs. Liquidity pools that attract the most liquidity tend to offer the most lucrative APYs. Although the yields for staking are generally lower than yield farming, staking tends to be relatively safer as rug pulls are less likely to happen on an established PoS network. Crypto investors can choose to stake their crypto for a longer duration to receive higher APYs.

Potential Risks

While the rewards can be attractive, users must be aware of the potential risks associated with both yield farming and staking. When it comes to yield farming, users are subject to a variety of risks that can potentially cause a loss of funds. Rug pulls, one of such risks, is common amongst yield farming protocols with shady and anonymous developers. Another risk commonly associated with yield farming protocols is bugs and errors in smart contracts. Yield farmers risk losing their funds when these bugs and errors are exploited by hackers.

Users who stake their crypto assets in a PoS blockchain may lose their staked assets if they fail to validate properly or act maliciously.

Disclaimer: This material is for information purposes only and does not constitute financial advice. Flipster makes no recommendations or guarantees in respect of any digital asset, product, or service. Trading digital assets and digital asset derivatives comes with significant risk of loss due to its high price volatility, and is not suitable for all investors.