Over the years, the methods of earning passive income have progressed from mining to staking and, most recently, yield farming. Yield farming became popular in 2022, thriving with Decentralized Finance alongside the new features it ushered. Due to the ups and downs of the crypto market, traders and short-term investors find it challenging to make a profit, which is why staking and yield farming prove exciting and reasonable alternatives.
Although both methods allow you to earn interest off your investment without active trading, one cannot help but wonder, yield farming vs. staking, which is better, and what is the difference?
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What is Yield Farming?
Yield farming is a way of increasing your crypto investment by lending it out. As the term “yield farming†suggests, it is putting your cryptocurrency investment to use and growing its value. Yield farming works with DeFi, and essentially your tokens are used within a decentralized exchange to offer liquidity to buyers and sellers on a particular trading pair. DeFi usually offers high-interest rates for users’ coins (as high as 12 percent).
What is Staking?
Staking is similar to yield farming, only that two different tokens are required in the latter, while in the former, you need to lend only a single token. Also, unlike yield farming, Staking serves even more advanced purposes. Staking provides liquidity and supports the blockchain through validating transactions on blockchain networks that use the Point of Stake mechanism.
Advantages of Yield Farming
- Flexible terms – Yield farming is a flexible method of investment compared to staking because, in most scenarios, there are no minimum lockup periods. In yield farming, you can choose to maintain, increase or remove liquidity.
- High yields – Yield farming offers you the opportunity to make more yields than staking. Although your yield depends on your trading pair, a profitable one can grant you the chance to earn very high profits.
Advantages of Staking
- Single token requirement – In yield farming, you need to provide liquidity for a trading pair; that means you need to have actual measures of both tokens concerned. However, when staking, you need to have just the token you are interested in staking.
- Fixed yields – Staking has fixed APYs; you know how much you will make after the staking term. Although the yield depends on token price action and market forces, you have an idea of the percentage you should expect.
- Good yields – Yield farming provides higher yields than staking, but staking still offers attractive yields.
Deciding Between Yield Farming vs. Staking
Yield farming has potential high yields, but it is risky compared to staking. In cases where the market turns too bearish or bullish, your yields could drop drastically. Staking offers less interest, and there is more significant constriction on access to your investment; most times, you cannot access your token until the expiration of the lock-in period.
These are things you should consider when deciding between yield farming vs. staking.
- Lockup terms – Generally, the higher the lockup period, the greater yields you stand to gain. If you lock up your tokens using a flexible time frame, your yields will be significantly lower than if you agree to a specific period (e.g., 6 to 12 months). Nonetheless, yield farming barely ever requires you to agree to lockup terms.
- Token type – The type of crypto token you are interested in staking or farming significantly influences the offers’ yields. If you opt for tokens like Bitcoin or Ethereum that already have an established project, yields are lower. Conversely, staking upcoming crypto tokens generates higher profits.
- Fixed vs. variable – Staking offers investors an accurate calculation of the yields they will make on staking their tokens. In yield farming, it is not as simple a calculation. Although your chosen lending platform will best offer estimates of predicted profits, they are inaccurate and could change due to different daily metrics. If you prefer lower-risk investment, it is better to stake your tokens.
Risks Associated with Yield Farming vs. Staking
A factor you should consider before choosing your investment method is the risk associated with both cases.
- Impairment risk – This risk is specific to yield farming. In some cases, leaving your money in your private wallet might have made you more money than putting it in a liquidity pool.
- Opportunity risk – This risk is specific to staking. When you stake your tokens, you lock them up for a certain period; within this time frame, you could lose out on other investment opportunities that would have been even more profitable. Because a smart contract holds the tokens, you cannot alter or access them no matter how much you need them until the lockup period is over. Yield farming does not come with such risk because you can always opt-out at any point.
- Platform risk – When staking or going into yield farming, you need to pay attention to the website you are going through. Whether they are centralized or decentralized, and if the case is in the former, you need to trust that your tokens are kept safely. In a decentralized platform, they do not have direct access to your tokens, so you are bound by the smart contract.
- Volatility risk – This risk is associated with both yield farming and staking. It means that after either process, the value of your investment might have reduced, even though the number of tokens you have might be greater than that which you started with. In other words, you might not make a profit.
- Smart contract risk – Smart contracts are susceptible to attacks and hackers if they are not built correctly. This is why you should conduct sufficient research on the platform you are using to stake or farm.
The Bottom Line
Yield farming and staking are both methods to make passive income from cryptocurrency investments. Yield farming is more suitable for experienced investors willing to take on additional risks to generate higher yields. If you are also ample on flexibility, yield farming is a preferable option.
Staking is better if you prefer to know how much you will make at the end of the staking period. However, if you want to stake while maintaining flexibility, you can search for and utilize flexible staking options, although this could negatively affect your yields.
