It is also for those who may know the basics right but may not have still found a reliable go-to resource that speaks more about the fundamentals.
Here is the list of differences between the two which will enable you to decide which way you should go for getting a higher return on your investments.
Over time, the crypto space is inundated with several decentralized exchanges or DEXs such as PancakeSwap, Uniswap, Quickswap or Serum.
This means that for every tradable pair, both the coin types need to be locked in a smart contract on the DEX platform to facilitate the transaction.
This is called staking. On the other hand, yield farming is earning rewards by providing liquidity, which can come in different forms, and then again staking them to earn further rewards.
However, it is quite risky and that is why you should know the differences between these two approaches along with their pros and cons.
8 Differences Between Crypto Staking and Farming
However, that is all about the basic differences between the two. There is more to it.
Here is the list of differences that will enhance your knowledge and make you a more confident crypto player.
Typically, the liquidity providers are rewarded with a share of the fees generated while trading a specific token pair and also with some new crypto coins while staking the liquidity provider tokens in a pool or a farm.
These tokens earned can be sold or converted again into liquidity to get more LP tokens. This, the liquidity providers, can stake again and get more rewards. This is called farming, or yield farming which literally means getting rewarded when liquidity is provided.
Crypto staking, on the other hand, is a specific activity performed by the investors which involves sending a particular token which can be either a stablecoin, an LP token, or just any other crypto coin, into a smart contract.
These coins that are staked are then locked in the contract till you withdraw or redeem them. The owners of the smart contract will typically reward you for such an act.
2. Annual Percentage Yield Rate
Ideally, you should make your choice based on the returns both will provide on your investment. Typically, according to reports, crypto staking may offer you returns within the range of 5% to 12%.
On the other hand, farming will provide an APY rate ranging between 2.5% and 250%, depending on the platform you choose.
3. The Risk Factors
Crypto staking is less risky than farming. The investors do not have to worry about the market. Whether the market is bearish or bullish, the investors will not lose their profits.
However, the lock in period can be a bit of a bother for the investors. And, it is also a relatively more unclear endeavor because it is all about providing liquidity to the protocol simply.
In comparison, the yield rate of farming may be more competitive than crypto staking, but the risks involved are much higher in it.
There is also the risk of losing it all depending on the market conditions. It is due to the higher risks that crypto farming provides a higher yield than staking.
Crypto staking is a broader term as compared to crypto farming. Ideally, crypto staking refers to putting up something as collateral which acts as a proof of the party involved that their financial interest is in the continued accomplishment of the protocol and it is all done in good faith.
For example, a user can lock up 32 ETH in order to be a validator node on the imminent Ethereum 2.0 network.
In the case of crypto farming, the actions of the investors practically refer to providing liquidity more exclusively to a DeFi protocol.
In return they earn a reward. Typically, the crypto farmers want to get the highest yield on their crypto assets and therefore actively rotate between pools.
When it comes to the need for staking, for some protocols it is needed to know the potential and functionality of the crypto assets which includes several financial functions.
Sometimes, the coins staked also perform a significant economic function which is to underwrite the coverage that can be offered to the users to protect their crypto assets in case there is a malfunction or a hack in the protocol.
On the other hand, the need for crypto farming, as said earlier, is to provide liquidity to the AMM or Automated Market Maker pool. The liquidity providers usually deposit the tokens in two variants.
As a reward, they receive a portion of the fees paid by the users using the pool to swap the coins. Usually, this percentage is calculated as a percentage of the pool created through these deposits.
6. Working Process
However, they do not need to lock a large amount of funds as staking and the borrowers here can borrow funds and pay interests in it. All these activities are automated using smart contracts which eventually minimize the risks involved in the process.
This prevents the developers from transferring your crypto assets without your permission or stealing them manually. The time taken for the funds to mature is also quite less as compared to staking crypto coins.
The investors receive several governance tokens in lieu of lower fees that are generated across multiple liquidity pools.
On the other hand, crypto staking primarily works on the PoS or Proof of Stake consensus mechanism. In this process, a block is created by the validator by using a random selection process.
In turn, the validator receives rewards that are usually paid by the investors of that particular platform. The rewards earned are higher and better if the stake is higher.
There are lots of ways in which staking supports different crypto coins and DeFi protocols. For example, the Ethereum 2.0 network is changed from the Proof of Work or PoW model to the Proof of Stake or PoS mechanism.
This means that the network will no longer be supplied with hashing power but will now need a staking block of 32 ETH coins in order to verify the transactions made on the Ethereum network. In turn, the investors will get block rewards.
On the other hand, crypto farming is a comparatively newer concept and therefore offers less support in comparison to staking in spite of some similarities between the two approaches.
When you consider the DeFi platforms and apps, the primary objective of crypto farming is to attract liquidity and in turn reward the investors for lending their assets to the platform.
In turn, they support the customers who want to use their services and products by redistributing the crypto assets earned.
8. Impermanent Loss
A particular risk of yield farming is incurring impermanent loss especially when a double-sided liquidity pool is used. For example, if you use an ETH-DAI pool where DAI is a stablecoin, the value of the pair will typically depend on the parity with the US Dollar.
However, ETH has unlimited potential and therefore when the value appreciates, the ratio of the two assets deposited by the user is adjusted by the Automatic Market Maker model.
This ensures that the value of the two assets remain constant. This is where impermanent loss creeps in due to the disconnect between the number of tokens deposited by the users and their value.
This is because with the increase in the value of the ETH coins the number of it with respect to the number of DAI coins deposited decreases.
In comparison, there is no such risk in crypto staking. Since the coins in this process are simply sent to the smart contracts and locked, the chances of incurring losses are diminished.
This is due to the fact that the users cannot remove the coins invested from the pool as in crypto farming, which makes the impermanent losses incurred in these cases into a permanent loss.
Which is Better – Crypto Staking or Farming?
Liquidity is a very important aspect to have for any new crypto coin or project. This will allow people to trade it freely. In addition to that, it is also very relevant and vital for the DEX platforms.
In fact, several networks are also allowing their holders to stake their coins in their NPoS or Nominated Proof of Stake as well as nominate validator nodes for the consensus mechanism.
The investors earn a handsome Annual Percentage Yield or APY in return. There are also other protocols that allow users to stake tokens to take part and vote on the development as well as governance decisions.
However, these particular entities work much like commercial banks that take the deposits of the customers, lend them out to others seeking credit who pay interest on the loan and the depositors receive a part of that and the banks keep the rest.
It is good to know that providing liquidity is not a process that is only applicable to the DEXs.
It is also offered when you lend your crypto tokens to other people based on the different lending protocols or even when you offer them as collateral for your insurance and other aspects.
However, providing liquidity in any way involves a lot of risks. This is because, in the true sense, you are actually letting other people dump on you if any one of the two crypto assets locked has any issues.
It is for this reason you should choose between crypto staking and yield farming after proper consideration of the different facts and factors mentioned hereunder.
Typically, in today’s crypto space both staking and yield farming coexist. Therefore, it will be hard to say that one is better than the other and you should follow one and discard the other. There are specific reasons for it.
For example, there are several projects that offer staking a single asset. This means that it is not required to offer liquidity anywhere.
All you need to do is lock the asset up, which can be a project token or a coin, and get rewards for it in return.
It may seem not to make any sense but there is a specific purpose solved through this activity.
Usually, when you lock an asset for a day or so, it will need making a deposit or paying the withdrawal fee. This is the income of the platform.
- Apart from that, other benefits of locking tokens in a smart contract include:
- Using them to buy back the tokens of the project
- Reducing the supply of coins in circulation and
- Making the value of the token look seemingly cheaper.
In addition to that, it will also boost up the TVL of the project. It will help the project gain a better position in the TVL rankings.
Here, TVL stands for ‘Total Value Locked.’ This is actually a number represented in US Dollars which signifies the value held in the smart contracts in a given period in time by the particular project.
This helps in estimating the success of a project or its likelihood of survival.
However, looking at things from a different perspective entirely, staking crypto coins can prove to be a highly risky option as long as the market experiences some downturns.
In such a situation, the best way to go ahead is to target the blockchain networks exclusively, especially those networks that do not come with time locks.
This will allow you to ‘unlock’ your crypto assets any time you want and sell them off in the market if you anticipate a further drop in the prices of the coins in the future.
On the other hand, crypto farming is for the more experienced investors who have a higher risk tolerance.
This is because it is a more complicated process that comes with a high price and high safety risks but offers higher rewards.
This means that you, as an investor, will need to look for better liquidity pools continuously.
Therefore, it is not for the average market participants because the yield rates may be the best but may also be exhausting for them.
The investors usually prefer crypto staking over farming because it does not come with security risks though with lower rewards.
However, chances of losing your profit are minimal because you can incur losses only when you engage in time locks.
More importantly, as it is in 2021, you will hardly find any other option that enforces such a rule.
The gas fees of the two should also be an important factor to choose between crypto staking and farming.
As for crypto staking, the gas fee is quite affordable but the higher gas fees in farming will surely eat away your profits made due to the incredible APY rates.
This can be a deal breaker for many investors who want to make it big with farming.
This is because the investors need to move from one liquidity pool to another. Moreover, such transfer requires a minimum of two transactions in the form of a deposit and withdrawal.
For this, the investors need to pay the gas fees which they usually need to do by using a part of their crypto assets.
Usually, this gas fee can be more than $100 for every transaction which is due to the fact that the Ethereum network is still not scalable as of now. And, this high gas fee can even last for a month, if not more!
Now, while considering crypto farming, you should consider the impermanent loss factor in depth.
Since these losses are inevitable depending on the specific type of coin pair you choose to invest, you should think about platforms that offer impermanent loss protection on the deposits made by the users.
There are several such platforms that offer such protection through the Automatic Market maker models.
In addition to that, there are also several other interest bearing and farming products that will provide a protection against incurring impermanent losses with their design.
If you research on this aspect and choose a platform that will minimize your chances of incurring impermanent losses, crypto farming can prove to be quite a lucrative option.
This will be especially true if you invest in a project that is in its early days. This is because this will provide you with an opportunity to make a deposit which will be a large part of the entire liquidity pool.
However, you should always keep in mind the inherent volatility of the crypto assets as it can offer a significant amount of risk all by itself.
In addition to that, you must also consider the new financial products as well that come with innovative designs.
These financial products can impose new risks that you should also consider and take proper precautions from before you step into the field, or into the pool to be precise, for crypto farming.
Therefore, crypto farming is surely not a viable option for those investors who do not have a considerably big portfolio since the high fees will eat up their profits.
You should have a lot of money as well as earn a lot of crypto coins in order to compensate for the high gas fees as well as the impermanent losses incurred, if any.
It is this simple fact that makes crypto staking the winner in most cases and for most of the people.
Crypto staking and farming are both quite productive ways to put your idle coins to work, just like liquidity mining. Knowing the difference will help you to choose the more lucrative option. Just consider the risks and find an audited platform.