Yield Farming vs Staking: Key Differences

DeFi yield farming protocols incentivize crypto holders to lock up their crypto assets in the smart contracts of a liquidity pool. There are several types of yield farming. A protocol might be a crypto exchange, where the pool provides liquidity for the platform to operate. Alternatively, it could be a crypto lending platform where pool funds are lent to borrowers. Liquidity providers earn a return, which can be in the form of transaction fees, governance tokens, or loan interest calculated by annual percentage yield (APY).

Benefits

Yield farming enables investors to earn a potential reward from their assets while retaining ownership of their cryptocurrency. DeFi projects benefit from the liquidity they rely upon to operate. DeFi projects can offer high yields, in excess of the returns on offer from traditional financial options.

Risks

Yield farming is risky. There’s the danger of impermanent loss if the pool’s automated market maker (AMM) rebalances a pool with token pairs, selling the expensive crypto and buying more of the cheaper tokens. This can also happen in the case of a rug pull if an illicit actor creates and promotes a pool only to sell off an investor’s high-value, established token, leaving them with the much less valuable pool token. Yield rates also change, falling if more investors join the pool. Then there are the problems of cryptocurrency volatility and the technical hazards such as smart contract flaws and hacks.

Crypto staking involves locking up crypto assets into their native blockchain to help validate, secure, and sometimes govern the blockchain network in return for a portion of newly minted crypto or other reward. Staking occurs on proof-of-stake (PoS) blockchain networks, so it’s not applicable to every cryptocurrency.

Benefits 

Staking is a way to participate in the governance and future of a blockchain. It helps the network process transactions securely and operate efficiently and can earn investors passive income. Staking is less complex than yield farming and doesn’t require as intense monitoring of investments, though it’s wise to keep an eye on staked coins and their networks. 

Risks 

Staking cryptocurrency requires a crypto balance to be locked up, so it can’t be sold quickly if the crypto’s price drops. Some staked tokens can be used or traded; this will depend on the network’s rules. A further risk of staking via a validator pool is if the validator acts contrary to the interests of the network, which can result in assets being slashed or destroyed.

Key Differences

An investor comparing yield farming vs. staking will realize there are important differences, including the level of risk and complexity. In yield farming, investors add their crypto to DeFi platforms and liquidity pools. In staking, crypto owners join a validator pool or become validators themselves.

Yield farming has several variations, and it can be complex and riskier than staking, but the rewards offered may be higher. In yield farming, rates of return can be set by the pool and can change with a crypto’s price. The smart contracts that operate protocols are at risk from failures and breaches. In staking, returns are linked to the network’s consensus mechanism and the overall success of the blockchain and there isn’t the risk of impermanent loss. In staking, a lock-up period and a minimum stake may be required.

Yield Farming and Staking Similarities

Yield farming and staking share some similarities as ways to earn passive income from crypto holdings and can provide an opportunity to contribute to the success of a DeFi protocol, decentralized exchange (DEX), or blockchain network.

Suitability for Different Types of Investors

Investors will choose between yield farming and staking based on an in-depth understanding of how each works, the risks and benefits, and their own risk tolerance. Yield farming can be riskier and more complex, but protocols can promise high returns. In yield farming, there are more fraudulent projects, scams, and security risks.

The Process of Crypto Farming

In yield farming, crypto assets are committed to a DeFi platform liquidity pool, which is a smart contract for holding funds. The funds provide liquidity to the platform and are used to enable crypto trading or lending and borrowing. The platform earns fees, and liquidity providers earn a return. Yield farming is also known as liquidity mining.

Key Platforms for Crypto Farming

One of the first yield farming opportunities was the Compound protocol. In addition, for crypto farmers, PancakeSwap and SushiSwap are popular decentralized exchanges.

Major exchanges that facilitate yield farming include Binance, Huobi, and OKX. AAVE is another platform enabling this method of passive profit generation.

The Process of Crypto Staking

It’s possible to stake crypto through an exchange or a cryptocurrency wallet or join a validator pool. Becoming a validator is more complex, requiring hardware and software and compliance with the network rules. A minimum stake is usually required, leading many investors to place a lower stake by joining a validator pool with other investors. 

Key Platforms for Crypto Staking

Many leading cryptocurrency exchanges facilitate staking. In addition,  wallets like MetaMask and TrustWallet offer staking. DEX platforms like Uniswap also offer staking, and there are many DeFi staking options.

An investor’s risk tolerance, crypto knowledge, and level of portfolio diversification are all factors they should consider when choosing between crypto farming vs staking.

Technological Advancements

Both yield farming and staking are popular and competitive sectors. Staking relies on the success of PoS blockchain networks, and there are other types of consensuses emerging including hybrid models.

Our CoinHint analysts believe that these sectors will progress with continued technological innovation in the space, with new features, user experiences, and initiatives. However, as more investors participate, the available rewards may decline, and DeFi projects will need to innovate to remain sustainable.

Regulatory Impact

In particular, yield farming may fall under regulatory scrutiny as governments and financial bodies look to add controls and rules to cryptocurrencies, perhaps restricting investor activities. However, staking could also be impacted as the crypto market evolves. Both generate gains and have implications for tax. Singapore, for example, has already added some staking restrictions.

There are substantial risks associated with yield farming, staking, and cryptocurrency use in general that investors must consider, along with their own risk tolerance. Investors should never invest more than they can afford to lose. Both yield farming and staking, however, offer opportunities for crypto owners to put their assets to work and diversify their crypto investment strategies.