Staking and yield farming are two popular methods for crypto investors to earn passive income without actively participating in trading. However, these strategies differ from each other in terms of mechanisms, rewards and risks.
What is cryptocurrency staking?
Staking involves locking a cryptocurrency on a blockchain using a proof-of-stake (PoS) algorithm in a special cryptocurrency wallet to participate in the protocol's consensus mechanism. USDT ERC20/TRC20 exchange operations are not required to participate; you need to block native blockchain tokens. The main idea behind locking crypto assets is to ensure fair participation. Since there are penalties for violating the rules of the protocol, stakers are likely to carefully check and add only legitimate transactions and data to the blockchain.
Although staking is primarily aimed at protecting and validating the blockchain network, investors who lock up their assets receive rewards.
How does cryptocurrency staking work?
Unlike proof-of-work (PoW) blockchains, which require the participation of miners and nodes, PoS blockchains provide transaction verification and network security through validators, eliminating central regulators.
The more cryptocurrency you stake, the more likely you are to be chosen to validate and add new blocks to the blockchain. As a validator, you receive a certain commission percentage for each validated transaction. In addition, depending on the size of your staking, you can receive additional rewards such as newly minted coins, interest and voting rights. If you need to exchange earned BNB to SOL, you can always use the services of the LetsExchange service.
Staking options:
- Validator participation. You can stake the required number of tokens to maintain and run the hardware or software that stores data, processes transactions, and adds new blocks to the blockchain. This option brings the greatest rewards, but also requires more effort since the validator nodes must run 100% of the time without failure.
- Delegation. Another way of staking is to create validator credentials, deposit the required number of tokens, and delegate the verification process to the service provider running the validator node.
- In case you do not have enough tokens to run a validator node or prefer not to manage it yourself, you can use staking services offered by centralized and decentralized exchanges or join a staking pool.
In the latter option, you will most likely pay a commission to the service provider, but the reward will be paid regularly.
What is yield farming?
Yield farming is the process of lending crypto assets to decentralized finance (DeFi) protocols in order to earn rewards. The main objective is to generate profits by providing liquidity or depositing tokens into DeFi protocols used to facilitate cryptocurrency swaps or issue loans with interest.
How yield farming works
Supplying liquidity on decentralized exchanges (DEX). Instead of keeping crypto assets dormant in wallets, you can put them on a DEX as a liquidity provider (LP). This will allow you to earn a percentage of the trading commissions generated by the DEX, as well as possibly governance tokens.
Lending using the DeFi protocol. When you issue loans, you receive a portion of the interest paid by the borrowers, and sometimes DEX governance tokens.
If you decide to add funds to the liquidity pool, you need to connect your cryptocurrency wallet, initiate a smart contract and track your rewards. The smart contract will issue you a token, which is used to receive rewards and redeem your crypto assets. Rewards earned can be reinvested into DeFi protocols for additional profits.
As a profitable farmer, it is important to actively manage his assets, adapt to market changes and use various strategies to maximize profits.
Staking vs yield farming
Generating passive income through staking and yield farming are two different strategies with their own pros and cons. Let's look at their most important aspects.
Complexity:
- Staking. Self-staking, such as running a validator node, requires a high level of complexity and labor. However, other staking methods, such as delegation, are usually simpler. In general, staking is considered a less complex strategy.
- Yield farming. This strategy is more complex as it involves participation in multiple tokens, protocols and strategies. Yield farming requires a deeper understanding of the market and more transactions.
Rewards:
- Staking is more predictable and stable, but brings in less income compared to income farming. Staking rewards are based on the parameters of the underlying PoS network.
- Yield farming allows you to earn more as it provides dynamic interest rates depending on supply and demand in the market. May provide higher incentives and interest.
Risks:
- Staking is generally less risky, and the likelihood of losing crypto assets is relatively small. The greatest risks are associated with periods of a bearish trend, when the owner of the coins will not be able to quickly sell them. Violators of the protocol face fines
- Yield farming is subject to large market fluctuations, smart contract vulnerabilities, and possible asset losses. This strategy is more dynamic and the risks associated with changes in trading commissions and token prices are significantly greater
The choice between staking and yield farming depends on your preferences and level of comfort with risks. If you prefer stability and a less complex strategy, it is better to choose staking. preferred. Whereas, if you are active, risk-averse and looking for higher income, yield farming may be more attractive to you.
Combining both strategies in your portfolio may be the best solution for diversification and maximum passive income.