Staking, Mining Or Yield Farming?
What’s the difference, and is one better than the other?
The world of cryptocurrency has attracted some of the most innovative thinkers in the fields of finance. It constantly opens new possibilities to invest digital assets creatively.
Just in the last couple of years, we have seen a spike in popularity in some of the newest innovations: yield farming and liquidity mining. These DeFi trading strategies require participants to pledge their assets in various ways in support of a decentralized protocol and application.
These offer alternatives to more traditional models previously used in the cryptocurrency realm, such as staking.
But how are these concepts different? And which of them is the best for you?
Here’s a breakdown.
Staking — securing the blockchain
In staking you lock up your cryptocurrency for a certain amount of time to secure the network or blockchain integrity, meaning you help ensure that the data on the blockchain is true, and in return you earn staking rewards. With staking you help come to a decentralised consensus that the information on the blockchain is true.
A good example of this is the Ethereum 2.0 network, in which users are required to stake a minimum of 32 ETH in the platform. This represents a transition from the Bitcoin used Proof of Work model (in which users must participate in mining the currency, which is very secure but also energy intensive) to a Proof of Stake model (which is less secure but also much less energy is used).
The biggest advantage to staking is its relative safety. The act of staking assets makes the platform more secure, hence making it also more difficult to attack.
But one drawback to staking is that it does not result in the best Annual Percentage Yield (APY). It usually pays out an annual basis, and results in a return between 5% and 15%.
Yield Farming — liquidity provision
In yield farming, participants provide liquidity to the cryptocurrency pool by borrowing and lending tokens as they move from one pool to another. This is not related to securing the blockchain, it is a different way of participating in the network. The goal of yield farming is to reap as much profit as possible by rotating among various pools.
When you deposit assets into a pool, you make a profit off the fees which creditors pay when they borrow from that pool. You earn a certain percentage based on the percentage of the total pool that you deposit.
Yield farming is highly profitable compared with staking. In some cases, you can earn as much as 100% of your investment.
The biggest disadvantage to yield farming is the risk involved. The movement of assets among the various liquidity pools can result in impermanent loss, depending on the timing of when you take the funds out of one pool to deposit them into another. In some cases, you can purchase insurance to help cover the loss, but this can eat into your profit, as well.
Liquidity Mining — liquidity provision
Liquidity mining is a subset of yield farming. The main difference is that liquidity providers are compensated not just with fee revenue but also the platform’s own token. These rewards help cushion the results of impermanent loss on that platform.
Liquidity mining can be used in conjunction with staking, as you have the option of staking the tokens that you earn.
Unfortunately, liquidity mining is often managed using a smart contract. These can bring vulnerabilities that make the platform easier for hackers to access.
Staking, yield farming, and mining all bring certain risks and benefits. It’s just a matter of deciding how much of a profit you want and how much risk you’re able to absorb to get there.
All these methods put idle crypto-assets to work. Yield farming aims at gaining the highest yield possible, liquidity mining focuses on providing liquidity to the DeFi protocol, while staking focuses on helping a blockchain network stay secure.
