Earning passive income from Yield Farming and Staking is one of the most popular topics amongst crypto enthusiasts. People said that cryptocurrency would not last longer than a few months a few years ago. They also stated that it would take decades. Four years ago and a pandemic later, we can see cryptocurrencies laughing.
Earning through cryptocurrency has become one of the most preferred ways to earn passive income currently. Everybody knows investing in crypto gives you great returns on your investments. Just downloading a crypto exchange app and spending your fiat on a random website will not show you your desired results. Here are a few insights to know dive deep into the crypto world.
Crypto and the Decentralized Finance
When there is a bank transaction between two peers, there is always an intermediate centralized authority that controls them. They take up transaction fees which makes people depend on them. The introduction of blockchain technology allowed the peers to register these transactions in a digital ledger. This gave rise to Decentralized Finance or De-Fi. Defi enables users to do independent transactions and other financial functions without the intervention of a third party, as in centralized finance. People can exchange, send, receive, and trade money easily on the blockchain network.
Enough of all introduction, it is time to know about Yield farming and staking and which one is better for passive income right now?
Comprehending Yield Farming
Defi Yield farming is, of course, a better way to get passive income in crypto. It is also called Liquidity mining. In yield farming, people can earn passive income by investing their cryptocurrencies or crypto assets in a decentralized platform and increasing them. It is considered a high-risk and high-yield method of earning passive income.
The crypto user can generate new cryptocurrencies by investing them in the liquidity pool of a decentralized exchange platform. The platform will use these currencies to maintain liquidity, trading, lending, and borrowing. The platform earns fees for these transactions, and the yield farmers will, in turn, get a share of them according to their investment in the liquidity pool.
Why do people get into Yield farming?
Yield farming has been the talk of crypto from 2020, and crypto geeks fiend yield farming an upgraded version of staking. Yield farming offers passive income to crypto enthusiasts seamlessly through the transaction fees from the defi platform. There are several reasons why yield farming flourished in 2020, and people are still considering it as the best way to invest in their crypto holdings.
- People receive based on interest when they invest or lend their coins in a decentralized app. This interest changes based on the demand of the crypto asset.
- The interest is earned daily is paid in the form of new crypto coins.
- The value of these new coins will also increase, thus increasing the overall value of the invested asset.
- This is better than storing the crypto in a wallet without using them.
- Interest, transaction fees, token rewards, and price appreciation offers better return when compared to other modes of earning passive income.
- Yield farming is an inexpensive way to earn better in crypto than mining, requiring special equipment.
Now that you have better-understood yield farming, it is important to learn about staking; a trending passive income method introduced even before yield farming.
A blockchain needs validation of the transaction data in the network, which is done by the Proof-of-stake consensus mechanism. This will validate the data entries in the blockchain network, process the transactions, and create new blocks in the blockchain network. Staking is a method where people can commit their crypto assets to the blockchain network, which can validate the data entries in that blockchain, which will, in turn, offer rewards. To make it simple, staking is a way of earning passive income through earning rewards by holding some amount of cryptocurrencies in the staking pool for a certain period.
What do people get from staking?
When people lock their crypto assets in the blockchain network, they can get rewards through that. Some of them are listed here to understand the difference between Yield farming and staking.
- The people who stake their crypto assets validate the blockchain transactions depending upon the number of cryptos they stake.
- They can earn native tokens as rewards when contributing to this validation process or staking pool.
- The more coins are in the staking pool; the people earn more rewards based on that.
- Since Staking is based on Proof of stake, it is cheaper to start staking, and it does not need any expensive equipments and gas fees to get started.
Which suits you better? Yield farming or Staking?
Hope what you read above gave you a glance at yield farming and staking. There is also mining introduced even before these two, and geeks are still mining. But Yield farming and staking now pose better returns right now.
Though both ask the users to leverage some amount of their crypto-asset for a period of time, they both differ in offering rewards at different levels.
In terms of Complexity
When it comes to simplicity, Staking is easy where you just have to select the staking pool and lock your cryptos in them and watch them out to get profit.
But when it comes to Yield farming, you should have sound knowledge on selecting the DEX platform and selecting the token to lock them in the exchange. Profit or passive income depends on how efficiently the user uses the tokens and dex. Yield farming requires continuous switching of platforms and tokens.
In terms of risk level and profitability
Yield farming poses a high risk as it can lead to rug pulls. But at the same time, passive income from yield farming is considerably higher. APY around 1% 1000% is possible with Yield farming. The risk involved in Staking is less, and the APY is around 5 to 14%.
The passive income also depends on the time interval during which the crypto assets are locked. Inflation and transaction fees must also be taken into account before selecting between Yield farming and Staking. Crypto geeks are getting into defi development and yield farming platform development these days. This decade will see a boom in these two protocols in the crypto world.
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Yield Farming Vs Staking- How Do They Offer Better Passive Income? was originally published in DataDrivenInvestor on Medium, where people are continuing the conversation by highlighting and responding to this story.