Staking VS Yield Farming: What Is The Difference

Staking has been around longer than yield farming, but in 2024 these two become the most popular ways for crypto investors to earn passive income. There are both viable ways of making money without being active in the market. But both strategies operate differently with their own mechanisms, rewards, and risks.

In this article, we'll look at each method for earning passive income to help you make an informed decision and find the best variant that suits your goals.

What Is Staking?

Staking involves the process of supporting the operation of a certain blockchain by storing cryptocurrency at a crypto wallet or on a platform in order to receive rewards. The staking process uses the Proof of Stake (PoS) consensus algorithm.

Factually, the cryptocurrency owner provides the platform with the specific coins for storage for a period of time. In turn, users receive a reward in the form of additional tokens. The reward is usually paid in the same cryptocurrency that is used in staking. The more liquidity, the better the reward, so staking remains a popular source of passive income, sometimes with double-digit APY percentages.

When it comes to the liquidity pool in staking, the following situation may occur. In general, the liquidity pool is a set of funds locked in a smart contract in a decentralized finance (DeFi) network. Liquidity pools in DeFi platforms have created an opportunity for participants to earn passive income. By contributing assets to it, individuals can earn a portion of the transaction fees generated by the platform. More information about the liquidity pools can be found here.

But in small pools, one large transaction can cause a sharp jump or collapse in price, causing providers to suffer intermittent losses. If users decide to withdraw their assets when token prices have deviated from their time of deposit, the impermanent loss becomes permanent. In contrast, with staking, there is no adjustment to the overall value in liquidity pools, and stakers will not lose money due to uncontrolled price fluctuations.

What Is Yield Farming?

Yield farming is a movement of investors whose goal is to earn as much as possible by investing assets in protocols in the decentralized finance (DeFi) segment. The user locks a certain amount of crypto assets on the smart contract of the platform or protocol, thereby replenishing the necessary liquidity level for the correct operation of the service.

For providing such liquidity and the ability for other users to exchange DAI for COMP (or vice versa) at the current market price, the farmer receives a commission from each completed transaction. The more liquid and in-demand pair he makes and the more capital he provides to the pool, the higher his income will be.

In this way, users get passive income on the amount of their invested crypto assets, while providing liquidity and the technical ability to exchange and move digital funds.

Staking vs Yield Farming: Head-To-Head Comparison

At first glance, these concepts look quite similar. In both cases the user locks their coins to earn interest on them. However, it becomes clear that they are not the same thing. Let's look at the key differences between staking and farming.

Difficulty Level

While staking on your own is a complex and time-consuming process, few investors choose to take this route. Rewards are usually awarded periodically, often every few days or weeks, depending on the network. While yield farming’s rewards are awarded more dynamically, sometimes even hourly, depending on the activity in the liquidity pool and the conditions of a particular protocol.

On the other hand, staking methods are generally simpler than yield farming, because you only need to stake one token per blockchain protocol. Farming typically involves more tokens, protocols, transactions, and strategies, making it more complex and expensive.

Rewards

Since staking is more predictable than farming, you’ll likely earn fewer rewards for this than from farming your assets. Staking rates are based on the parameters of the underlying PoS network. Meanwhile, yield farming has more dynamic interest rates and incentives that depend on the supply and demand of the underlying protocols.

Risks

The likelihood of losing your crypto assets is lower during the staking process than during the farming one. But you will suffer losses if a bearish trend starts while your assets are at stake, so if they are locked, you will not be able to do anything.

Transaction Fees

With staking, fees are mostly network ones and are charged for locking and unlocking funds. In this case, there are lower and less frequent transaction costs. With farming, fees are much higher since they are charged for each operation: adding funds to the liquidity pool, withdrawing funds, exchanging tokens, etc.

What Should I Choose?

You can earn passive income from staking or farming. The choice between these processes comes down to your preferences, risk tolerance, and available resources.

If you prefer a simpler, more stable and less risky strategy, you’ll be better off choosing staking. If you’re more active, prefer higher returns and can handle more risk and difficulty, you might prefer to consider yield farming. Alternatively, you can combine the two strategies to diversify your portfolio and maximize passive income.

In some ways, yield farming can be compared to staking. Yield farming is different from staking, which still offers income. In farming, capital is used to provide liquidity and earn rewards, while in staking, investors participate in a Proof-of-Stake (PoS) blockchain mechanism and earn money for using it.

In yield farming, investors try to earn a return on their capital without tying it up to a specific entity for a specific period. However, there is more responsibility on the investor doing yield farming, as the rapidly changing conditions in DeFi can greatly affect profitability. Staking, on the other hand, can act as a more "automated" approach to crypto investing.

We hope that this article will help you decide which method of cryptocurrency investing is preferable for you to achieve success in the sphere of digital finance.