Yield Farming vs Staking: Equitable Analysis
For most crypto enthusiasts, 2021 has been nothing short of amazing, and despite starting 2022 on a mid-note, the massive eruption of new exciting developments hasn’t been altered. The most intriguing part for some has been decentralized finance (DeFi).
By boycotting financial third parties, DeFi introduces traditional banking services like lending, borrowing, investing and saving to the blockchain. Also, it improves the strategies for managing digital assets.
Currently, the total market value in DeFi contracts is more than $42billion, with a 52% increase over the past 24 hours.
Being around for some years, the evolving solutions for DeFi are attractive to startups and individuals — increasing its financial inclusion worldwide.
Besides the regular financial solutions available to the public, the most notable trend and discussions about the DeFi boom would be staking vs yield farming.
While the two features offer credible ways of earning passive income in crypto — they differ in approach and underlying technology.
What Is Yield Farming?
Yield farming is an aspect in defi that involves earning crypto assets from your crypto holdings. As the name ‘farming’ implies, it is essentially “growing your cryptocurrency.”
Using different protocols that entail locking up cryptocurrencies for rewards and moving crypto assets in separate liquidity pools, yield farmers harness the best ways to increase their annual percentage yields (APYs).
The Yield farming mania can be linked to when Compound protocol started distributing its governance token COMP to its users.
What Is Staking
Each blockchain network comes with an underlying technology. Bitcoin, the first blockchain ever built, runs on Proof of work PoW.
However, Proof of stake is an alternative to the PoW, and its design mechanism revolves around validators staking their coin to generate new blocks.
The term ‘Staking’ is used in Proof of Stake consensus, and it involves the network users staking their holdings in a bid to stabilize and secure the network.
Here, the coins are staked and used to confirm transactions on the PoS network, and it usually comes with a reward. Some PoS networks like Cardano rewards users with their governance token ADA — in exchange for staking.
Yield Farming vs Staking
Given these details, you might wonder which is better yield farming and Staking. Well, Yield farming and Staking are similar, and both are great ways to earn passive income from your crypto assets. The key differences between them are based on factors such as Risk levels, Impermanent loss, Profits, Rewards, Security, and Mode of deposit.
Risks of Yield Farming
Many risks are attached to yield farming, it ranges from bugs, and liquidation to smart contracts risks.
Smart contracts power yield farming and a single weakness or bug can breach the entire network — causing you to lose your entire funds. An example of this was the death of the Yam finance token — fell from $167 to roughly $0.8.
In an interview with Unchained Podcast, Ethereum co-founder Vitalik Buterin emphasized the risks associated with smart contracts “I think one big one is just that a lot of people are underestimating smart contract risk.”
Risks of Staking
While staking can be rewarding, it comes with some risks including liquidation, bugs, and market risk. Often, you have to lock up your assets for a certain period of time and if the network is attacked or doesn’t work out, you could lose your money.
For example, on October 14, 2022, the popular crypto-staking platform Freeway, ceased withdrawals due to a potential rug pull. Other crypto platforms including Luna, Zipmex, Celsius, etc. have experienced their own share of rug pulls.
Wrapping Up
Essentially, using either of these two will put passive crypto-assets to work. Yield farming aims to increase a network’s yield while Staking focuses on maintaining a secure network.
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