There are several ways you can invest and earn valuable money with cryptocurrencies. When it comes to yield farming, it is a way of raising interest on your cryptocurrency, similar to earning interest on regular money in your savings account. What is the difference between yield farming and staking? That is the question.
Once you decide to lock up your cryptos for a prolonged period of time, it turns into a process called ‘staking’ - similar to depositing money in a bank account - that will earn some rewards, like more cryptos.
Yield farming has started in 2020, and since then, yield farmers have achieve returns in form of yearly APY, or percentage yields. Those are close to the triple digits. But achieving such a big return comes together with high risks, and cryptos are subjected to extreme volatility as well as rug pulls.
If that is your preferable way of investing, it is important to be well informed before diving into the farming world.
Staking can be a more intuitive concept to understand the market, whilst yield farming requires strategic manipulation to achieve higher profits. Both cases can offer highly attractive rates of return! Deciding between one of them depends on your level of investor experience and what is the best option for your portfolio.
What is yield farming?
Yield farming is a way in which cryptocurrency can be generated from your crypto holdings - that is where the name “farming” comes from, since it is a way of growing your own cryptocurrency. The process is based on lending your crypto assets to Decentralized Finance (DeFi) platforms, who then lock them in a liquidity pool, which is basically a smart contract for holding your funds.
The funds locked provide liquidity to the DeFi system, where they are used to facilitate trading, borrowing and lending cryptocurrencies. Through the liquidity, the platform receives fees that are given back to the investors according to their part of the liquidity pool. That is why yield farming can also be called ‘liquidity mining’.
Today, Aave (AAVE) and Compound (COMP) are two of the most popular DeFi protocols on the digital market for yield farming, and they have helped this area of the decentralized financial world to raise through the years.
For instance: every time a trader decides to exchange Tether (USDT) for Ethereum (ETH), it is necessary to pay some fee. This will be offered to the liquidity providers in relation to the amount of liquidity they are in addition to the pool. So, the more capital an investor provides to the liquidity pool, the higher will be their rewards.
Pros and cons of yield farming
By being a yield farmer, you are able to lend your digital assets through investment apps, such as the DApp or the COMP, that will then lend your coins to others, called borrowers, optimizing the whole transaction process. Interest rates may change according to the demand, but that changes daily, which means that the assets you lose on one day can be compensated on the next one. Also, you get funds in new COMP currency everyday, which can grow in value with time.
Yield farming will earn you way more crypto than any storage wallet possibly could, since farmers can earn a certain value during every step of the trading process, from the transaction fees, to interest, price appreciation and token rewards. Also, yield farming is an inexpensive way of trading, since you are not obligated to purchase any mining equipment or pay loads of money on electricity bills.
A more advanced yield farming strategy can be executed by depositing different tokens on a crypto platform, or by using regular smart contracts. A yield farming protocol usually focuses on optimizing returns whilst also taking security and liquidity into consideration.
What is yield staking?
Staking is the operation of giving support to a blockchain network and joining a transaction. This is possible by applying your cryptocurrency earnings to that network. They are used by a blockchain network that uses the PoS, proof of stake consensus mechanism.
That way, investors can earn some interest on their assets while waiting for block rewards to be unleashed. The proof of stake mechanism blockchain consumes way less energy than the proof of work. This is also known as PoW, blockchains, such as the Bitcoin (BTC) one. That is because PoS requires way less computing power to validate new blocks. Since their nodes are also used to authenticate transactions, also acting like checkpoints.
Pros and cons of yield staking
Yield staking is one of the best ways to ensure that a blockchain network is completely safe from hacker attacks. The more assets there are on a blockchain, the more decentralized and secure it is. Because stakers receive rewards for the maintenance of the integrity of their network. They tend to earn higher returns than those who invest on regular financial markets.
But that does not mean staking is a risk-free investment, since the stability of networks tends to fluctuate with time. In order to get the best earnings from staking, it is necessary to pay attention to the network functioning. So that, you can retrieve your assets once it is no longer stable.
What is the difference between yield farming and staking?
Both staking and yield farming are relatively new income strategies of the cryptocurrency market world. Specially when compared to other financial stock markets. From time to time, the process will be mixed up, making staking a subset of the yield farming process. Either way, both versions rely on holding your crypto assets in order to earn rewards. This allows investors to split the value of the DeFi ecosystem.
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Even though it is possible to profit high returns through yield farming and staking, it can also be incredibly risky. Anything can happen while your crypto is locked up. This is evidenced by the way many rapid price swings occur amongst the crypto market coins.
In order to ensure that your assets are safe and actually offering you the best returns you could possibly get, it is important to be well informed and up to date on the crypto market. And you can get all of that by joining a crypto signal Telegram group.
Today, one of the best options in the market is the FatPig Signals community. Their services offer daily market analysis, cryptocurrency updates and the best tips on when to buy, sell or trade your coins. You can also ask all of your questions about yield farming and staking to their professional traders. They have over 15 years of experience in the crypto market.