Yield Farming vs Staking: Which is Better for You?
Crypto, Knowledge

Yield Farming vs Staking: Which is Better for You?

Yield farming vs staking is two terms that are often interchangeably used in the decentralized finance system. While both of them involve locking the crypto assets in some decentralized finance protocol, the aim and outcome of yield and farming are very different from each other. In addition to being two major use cases of cryptocurrencies, they are great ways of making passive income from your existing crypto assets. However, it is possible that the investors may not resonate completely with each of these farming methods. Therefore, we have put a guide for you to find out which one of these is better for you. 

What is Yield Farming? How does it Work?

Yield farming is the process of locking your crypto-assets in a liquidity pool to provide liquidity to the decentralized protocol. The funds locked in the liquidity pool help in the facilitation of transactions such as borrowing, lending, and trading in the protocol. The pool, in turn for getting liquidity, earns a fee. This fee is awarded to the investors or the liquidity providers for their willingness to lock their money in the DeFi protocol. The farmers earn rewards in the form of APY rewards, transaction fees, and native governance tokens of the yield farming protocol. 

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Yield Farming- Explained

The amount of interest that the liquidity provider earns depends upon the proportion of their share in the liquidity pool. In addition to this, the number of days for which the farmers lock their assets determines the number of rewards earned by the liquidity provider. The more the duration and amount of shares locked in the protocol, the more profits reaped by the investors. 

What is Staking? How Does it Work?

Staking refers to the process of locking your crypto assets in a staking pool in order to generate new blocks of information via the Proof of Stake system. Proof of Stake is a great alternative to the energy-intensive Proof of Work protocol where excess amounts of energy are consumed in mining cryptocurrencies. On the other hand, the stakers stake their existing crypto assets in the staking pool and mine many different types of currencies. So, the main idea of staking is to secure a blockchain by improving its security feature rather than by providing liquidity to the protocol as in the case of yield farming. 

To stake cryptocurrencies, the investors must set up a crypto wallet and transfer cryptocurrencies in it. Then they need to decide on a staking pool depending on their preferences. Each staking pool has its own set of rules and regulations regarding the rewards. So, it is advisable for the investors to familiarize themselves with the staking pool before choosing one of them. Following this, the investors must lock their assets in the staking pool and wait to collect their rewards. 

Yield Farming vs Staking: Differences
Proof of Work vs Proof of Stake

Key Differences Between Yield Farming vs Staking

Here are five key differences between yield farming and staking.

1. Purpose

The purpose of staking your crypto assets is to be chosen by the protocol to become the validator of the next building block in the blockchain network. On the other hand, the purpose of yield farming is to earn passive income from pre-existing crypto assets in order to gain maximum profits.

2. Technology: Yield Farming vs Staking

The staking process employs a Proof of Stake consensus mechanism whereas the yield farming process uses an automated-market maker model for the farming of coins. This means that there are no third parties facilitating the buying and selling of coins.

3. Rewards

The staking rewards consist of the privilege of being the validator of the next block on the blockchain. This means that the investor who stakes the maximum number of coins in the protocol is chosen as the validator. They feed the transaction history into a new block on the blockchain network. In addition to becoming a validator, the investor earns native governance tokens depending upon their share. In contrast to this, yield farming gives APY rewards and native tokens to liquidity providers. 

4. Risks Involved: Yield Farming vs Staking

In terms of risks, staking has risks like an extended lockup period of funds, a long waiting period to collect the rewards, volatility, and validator risks. However, the risks included in yield farming are much more complex like rug pull projects, impermanent losses, smart contracts risks, and so on.

5. Simplicity of the Process

Yield farming happens to be a more complex strategy for making money from crypto assets. It is because it is difficult to choose the yield farming platform. This is because each platform has its own tokens that it would like the investors to farm. On the other hand, staking is a simpler form of making passive income. It is because the investors need to simply choose the right staking pool and lock their assets. 

Yield Farming vs Staking: Which is Better for You?

While choosing between yield farming and staking, the investors should set clear objectives for themselves. They must be aware of the returns they are expecting from each of these locking processes. Speaking of returns, the staking returns are much more steady as compared to the returns expected from yield farming. The users can expect to earn rewards in the range of 5-14%. Staking platforms like UniFarm, offer a minimum APY of 16%. In the case of yield farming, the number of rewards can fluctuate largely, depending on the shares added by the liquidity providers. 

Then the investors must also consider the amount of research and analysis they are willing to do, in order to search for the right yield farming platform for themselves. If they have no issues in doing the research and checking out the many different yield farming protocols, they are good to go with yield farming. However, for someone looking to reap benefits without doing much work, staking is the best option. 

Yield Farming vs Staking: Conclusion

Between yield farming and staking, it is pretty clear that staking is the better option to go. It is because it ensures a steady supply of rewards within a minimum amount of work. All the investors have to do is choose a staking pool, lock their cryptocurrencies, and wait to collect their rewards. 

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