Yield Farming vs. Staking

  • Staking involves delegating coins to validator pools for transaction processing and receiving rewards, while yield farming involves lending tokens to decentralized exchanges for liquidity provision and earning a portion of trading fees.
  • Staking is much more user-friendly than yield farming which requires in-depth knowledge of altcoins and the associated risks.
  • Yield farming typically does not offer stable returns and staking has higher yields, more often than not.

Staking involves delegating cryptocurrencies to validator pools that process transactions on the blockchain and are paid a reward for their contribution. On the other hand, yield farming involves lending tokens to a decentralized exchange to provide liquidity to buyers and sellers and is paid a portion of the trading fees.

Overall, staking crypto is a much better option for users to earn stable returns compared to yield farming. Investors can stake the most popular tokens such as Ethereum, Solana, and Cardano to earn attractive APY's long term, due to having stable market capitalization. Yield farming newer coins can provide much higher returns but has the risk of impermeable loss.

What is Yield Farming?

Yield farming is the process of lending tokens to a decentralized exchange to create liquidity and facilitate crypto trading between buyers and sellers. In return for providing liquidity, yield farmers can earn a percentage of the transaction fees for that pair. The concept of yield farming is very similar to lending in traditional banking, although the interest earned is much higher. The earnings are paid in the native cryptocurrency lent to the liquidity provider.

Yield Farming Pros:

  • Yield farming terms are generally quite flexible when compared to staking. Users don't have to lock their assets for a predetermined period of time to obtain the highest return. In essence, they can remove liquidity whenever they want. It is beneficial if an investor's assets are overexposed to a particular liquidity pool and they want to withdraw. Furthermore, if a liquidity pool offers a high enough APY, traders can add more tokens to the liquidity pool to earn more rewards
  • Depending on their cryptocurrency pair of choice, yield farmers have access to higher interest rates
  • Yield farming does not offer stable returns and can change rapidly without notice. In contrast, staking rates are fixed from the get-go and often are shown along with the lock-up period. Long-term investors may therefore be deterred from the volatile returns with yield farming

Yield Farming Cons:

  • Yield farming has been prone to thefts and rug pulls
  • Lucrative returns has driven an increase in the number of investors which dilutes the individual returns
  • Risk of impermeable loss and ultimately, the investor could have generate higher profits by selling on the market
  • Returns are highly volatile and unpredictable compared to staking
  • Not suitable for beginners that are inexperienced with DeFi and decentralized exchanges

What is Staking?

Staking is the process of delegating a single Proof-of-Stake (PoS) token to a cryptocurrency staking exchange or supported wallet for a specific period. The pool of tokens is used to validate transactions on the particular network protocol, create new blocks, and distribute newly minted coins as staking rewards. The reward is percentage-based on the number of tokens locked in. For a complete definition of crypto staking and how it works, read this article.

Staking Pros:

  • Yield farming can be expensive as it requires providing equal liquidity for both pairs. In the case of staking, however, there is only a single token requirement. That makes taking it a better option for beginners who have just entered the passive-income space of cryptocurrency
  • While not as high as yield farming, staking also offers high APYs. NEXO, one of the leading crypto lending platforms, offers as high as 16% Annual Percentage Returns on certain crypto assets
  • Yield farming does not offer stable returns and can change rapidly without notice. In contrast, staking rates are fixed from the get-go and often are shown along with the lock-up period. Long-term investors may therefore be deterred from the volatile returns with yield farming
  • Easier for beginners with 1-click staking platforms available

Staking Cons:

  • Limited to Proof-of-stake coins only
  • Can potentially lose money in locked-staking arrangements if the underlining asset price falls
  • Staking rewards when adjusted to inflation are not as lucrative as yield farming
  • Cryptocurrency staking platforms, in particular centralized exchanges, can charge a percentage based commission on the rewards up to 15%

What are the Differences Between Yield Farming and Staking?

The major differences between staking and yield farming are shown in the table below.

Yield FarmingStaking
A cryptocurrency pair has to be added to the liquidity pool to earn rewardsOnly a single cryptocurrency is required to earn rewards from the staking pools
There is no requirement to lock the assets for a certain period of time. Investors can withdraw their trading pairs whenever they want when it suits them for other purposes, giving greater flexibility over their assets.Most forms of staking require investors to lock their assets for a certain period of time, which can range from a week to multiple months. This can result in higher returns, but also increases the risk of significant depreciation if the market downturns while locked in
Investors can react to market conditions by rapidly withdrawing their tokens from the liquidity pools and exchanging them for other coins, stablecoins or even fiat currency.Investors cannot withdraw until the staking period is over, and thus, cannot react to the changing cryptocurrency market.
Interest rewards are much higher with yield farmingInterest rewards are lower with staking
Suitable for experienced investors only that have accepted the risk of impermeable loss with higher rewards.Suitable for beginners who want to earn profits by depositing a controlled amount of tokens using a reputable staking platform or wallet with stable returns.

Factors to Consider when Choosing Between Staking and Yield Farming

Investors must consider the APY and the best DeFi platform before choosing between staking and yield farming. Traditionally, seasoned investors opt for both. However, they only do so after considering the following factors.

  • Type of token. The token's market capitalization will have an immense impact on the yields it can generate. A higher market cap generally offers lower yields as there are more people in the pool. For instance, staking the world's biggest altcoin, Ethereum, will offer users a lower APY. This is because there are more staking pools and greater competition which reduces the number of rewards that are distributed.
  • Potential returns. Locking up an asset in a liquidity protocol or an exchange will allow the network to leverage it more, which equates to higher rewards. While staking does offer flexible terms, the Annual Percentage Yield is generally low. In the case of yield farming, however, there are hardly any locking requirements so this may be more desirable for those looking for flexible investment options.
  • Fixed or flexible terms. Staking offers a fixed staking return in most cases. The benefit of this is it allows the investors to calculate in advance how much money they will make when they sign the staking agreement. The same level of flexibility doesn't exist for yield farmers, however, as the ecosystem is extremely volatile. With no safety net for investors, yield farming is more suitable for veteran cryptocurrency investors.

Yield Farming vs. Staking Risks

It is important to consider that yield farming and staking are part of the cryptocurrency ecosystem which is largely a speculative asset class. Therefore, investors must pay heed to the following risks before investing.

  • Opportunity risk. This staking risk involves locking assets to acquire a higher APY. If the market turns bullish for the staked cryptocurrency, the individual won't be able to interact with the crypto market. It means they might lose the opportunity to cash in on the major gains with crypto price pumps. Since locked assets hinge on a smart contract agreement, the terms cannot be changed on the fly. There are no such issues with yield farming since withdrawing tokens from the liquidity pool is much more flexible than the former.
  • Impairment risk. This is associated with liquidity farming, which can potentially result in an impermanent loss. It means that the yields can be lower than the interest an investor can earn by putting their assets inside a private wallet. Moreover, when the funds are withdrawn, the fiat value could be less than the original amount.
  • Volatility risk. Volatility risks are common with both yield farming and staking. The value of assets held within staking pools and yield farms can decline due to sudden market volatility. This is more significant in fixed staking arrangements, as the owner will not be able to liquidate their holdings to mitigate against price declines.
  • Platform risk. Using a centralized exchange has a greater risk of failure that can result in loss of funds, as the owner doesn't have custody of their crypto assets. On the other hand, staking and yield farming via decentralized platforms involves depositing the assets directly through smart contracts. It stops the DEXs from having direct access to an investor's assets.
  • Smart contract risk. While smart contracts can't be amended, and they automate much of the process within the crypto space, they are not without their risk. Technical issues or faults within the code, and result in significant changes to the token metrics and result in losses. Moreover, there have been instances of DeFi hacks that have exploited several projects.

Which One to Choose: Yield farming or staking?

Since staking doesn't require much effort with several easy-to-use staking platforms available, it is better for beginner-level investors. In most cases, the staking process involves only holding the crypto assets in a cryptocurrency exchange, and the rewards will be generated. Overall, it is a great way to earn staking profits in the long run that is less vulnerable to the cryptocurrency market's volatility when compared to yield farming.

In contrast, experienced crypto holders may opt to use yield farming to maximize potential profits with reputable liquidity providers. Yield farming has on average significantly higher APYs than staking. Moreover, there is reasonable flexibility to remove funds from a liquidity pool in the event of a market shift in direction.

Frequently Asked Questions

What is the difference between farming and staking?

Yield farming involves lending crypto assets to a liquidity provider to facilitate trading between buyers and sellers. Staking means delegating tokens for the operation of a blockchain network by validating transactions.

Is yield farming riskier than staking?

Yes, yield farming is widely considered to be significantly riskier than staking since decentralized platforms and speculative tokens have been the victims of rug-pull schemes. Staking crypto is less risky as it involves contributing to the blockchain protocol which is more stable for long-term passive investors.