Difference Between Yield Farming and Staking

Yield farming, stake farming, and liquidity mining are three well-known concepts in the DeFi sector that have drawn a lot of attention. Participants in any of these three DeFi trading techniques are obligated to make a variety of asset pledges in favor of a decentralized system and application. In this article, we will look into the differences between yield farming and stake farming. But first, we need to know what these two exactly are.

What is Yield Farming?

Yield farming is undoubtedly the most well-known and common method for making money from cryptocurrencies. adding cryptocurrency to a liquidity pool, you can generate passive income. These liquidity pools can be compared to your bank account in terms of centralized finance where you keep your money and your bank utilizes it to make loans to other people while paying you a share of the interest gained.

What is Staking?

Staking, a term used in the cryptocurrency industry, is the act of putting your crypto assets up as security for blockchain networks that employ the PoS (Proof of Stake) agreement mechanism. Stakers are selected to verify transactions on the PoS (Proof of Stake) network.

Comparing Yield Farming and Staking

Lets now look at the key differences between them across the following parameters:

Investing and Rewards earned 

The passive income investors can earn by holding onto their investments is the main contrast when earning profits, between yield farming and staking. More can be invested in and grown the more returns are earned.

Yield farming is the process of investors locking their cryptocurrency assets into a liquidity pool powered by smart contracts, such as ETH/USDT. Other users of the same protocol can then access the locked assets. These tokens can be borrowed by users of that specific lending protocol for margin trading.

Meanwhile, in the case of staking, staking enables investors to reap gains right away while a transaction is being validated. The larger the staking incentives from the network are, the greater the stakes investors hold. Each time a block is validated in staking, new coins of that currency are created and distributed as rewards. This is known as "on-chain" distribution.

Transaction fees in both the methods

Yield producers who are free to transfer between liquidity pools but must pay transaction costs in the process would find gas fees to be a significant concern. Even if yield farmers find a larger return on another site, they must account for any switching costs.

Contrary to a PoW blockchain network, a PoS network(used in staking) does not demand its shareholders to solve computationally challenging mathematical problems in order for mining rewards. Therefore, the initial and continuing costs of staking are also reduced.

The security offered by both methods

Yield farming is based on the more recent DeFi technologies which may be more susceptible to hackers, particularly if a smart contract's code contains bugs. In contrast, because stakes are a part of the stringent consensus protocol used by the underlying blockchain, staking is typically more secure.

Level of risks taken

New DeFi projects frequently engage in yield farming, which can be very dangerous if "rug pulls" take place. This phrase describes how dishonest developers willfully remove funds from liquidity pools. Whereas, staking is an appealing option for customers who are fresh to DeFi because it requires a small initial payment. A PoS network that has been around for a while makes rug pulls less likely.

Complexities in Yield Generation

Stake farming is by far the simpler of the two methods as users only need to select a staking pool before locking in their cryptocurrency.

Alternatively, yield farming can be time-consuming because investors must decide which cryptocurrencies to offer and on which network, with the potential of repeatedly moving platforms or tokens.