What is staking in crypto?
Staking involves committing crypto assets to a blockchain network to participate in transaction validation. This process is used by blockchain protocols that use the proof-of-stake (PoS) consensus system. Validators earn interest on their crypto investments while also waiting for block rewards.
Compared to proof-of-work (PoW) blockchains, proof-of-stake (PoS) blockchains are less energy-intensive. PoS blockchains do not require massive energy to validate new blocks. Node servers are used to validate transactions on a PoS blockchain. Validators set up nodes and are randomly chosen to validate blocks. They receive crypto rewards for their investment and time.
What is yield farming in crypto?
Yield farming is a crypto investment method to earn more crypto from your holdings. This method draws analogies with farming due to its innovative method to grow crypto. Yield farming involves lending crypto to DeFi platforms to earn interest. These platforms lock your crypto assets in a liquidity pool, a smart contract for holding crypto funds.
The crypto assets locked in the liquidity pool provide liquidity to a DeFi application. These assets provide liquidity to facilitate lending, borrowing, and trading. Platforms earn fees for providing liquidity, which is used to pay liquidity providers (LPs). Liquidity pools are vital for the functioning of AMMs, or automated market makers. AMMs offer automated and permissionless trading instead of a conventional system of sellers and buyers. Liquidity provider tokens are issued to LPs to track their contributions to the liquidity pool.
Yield farming vs. staking
Type of crypto asset
You can lend any in-demand crypto asset to yield farming. You lend your assets using platforms like Aave, which simplifies the lending process. On the other hand, you can only stake the native crypto token of the network itself.
Earnings Potential
There are few lenders of a crypto token during the early days of a DeFi project. Some projects offer over 70% per year in yields if you are one of the early leaders in the project. Staking is a more stable crypto investment. The price of the tokens and the amount distributed as rewards determine your returns on staked assets. The returns are usually around 10% per year.
Complexity and effort required
Yield farming is not a simple method and requires an understanding of the decentralized finance space. You should also be aware of the expected returns for a given crypto asset. Top-yield farming practices involve swapping multiple crypto tokens to find the asset with the best return. On the other hand, staking is a simpler process. First, you choose the crypto platform to secure. Next, select a validator and stake the required tokens to start passively earning crypto. This process only gets harder if you decide to run a node yourself.
Risk Profile
Given the higher potential for returns, yield farming is more risky than staking. Yield farming can be directly affected by volatility risks, while staking is not affected as much.
Suitability for crypto investors
Yield farming is the choice for investors familiar with the DeFi lending space. Staking is better for new investors or users who prefer lesser risks.
Is staking crypto safe?
Staking is comparatively safe to make returns through a crypto platform you prefer. The chance of failure is lower if you choose an established blockchain to stake on. The expected return from staking is low compared to other DeFi protocols, such as yield farming.
Is yield farming safe?
Yield farming can be a safe investment strategy if you lend to low-risk crypto projects. However, you can earn more returns on riskier options, which have the chance to fail. It is vital to do your due diligence and weigh the pros and cons of a crypto project to find the best investment opportunity.
Is yield farming better than staking?
You can start earning from staking immediately as soon as a block is validated. A block reward on Ethereum is sent every 12 seconds. The returns from stalking are steady but comparatively lower in the long run. On the other hand, you do need to lock in your tokens for yield farming. It can allow you to switch between platforms to earn the highest possible returns on your crypto holdings. So yield farming may be the better long-term investment. It enables you to reinvest and switch between platforms to earn high returns, but it also comes with higher risk.
Conclusion
Yield farming and staking are relatively new crypto investment strategies. Both strategies can lead to decent returns for crypto users. Comparatively, yield farming can produce higher returns but also come with high risks. Staking, on the other hand, can produce steady returns with a lower risk of failure.
Staking is a more straightforward investment concept to understand, whereas yield farming requires more research and strategy to earn higher returns. Both protocols offer attractive rates of return. Deciding between staking and yield farming depends on your investment goals and risk appetite.
Visit ZebPay blogs and stay up to date with all the latest crypto news. You can now trade more than 100+ cryptos on ZebPay.
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Each investor must do his/her own research or seek independent advice if necessary before initiating any transactions in crypto products and NFTs. The views, thoughts, and opinions expressed in the article belong solely to the author, and not to ZebPay or the author’s employer or other groups or individuals. ZebPay shall not be held liable for any acts or omissions, or losses incurred by the investors. ZebPay has not received any compensation in cash or kind for the above article and the article is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.
