Yield Farming vs Staking: An Ultimate Guide on Crypto Passive Income
Are you interested in making extra money from your crypto investments? If so, you’re not alone. Yield farming and staking have become mainstream methods to generate passive income in the crypto space. The question is: what’s the difference between yield farming and staking? And which one is more profitable? Read on to find out. We’ll take an in-depth look at yield farming vs staking and cover everything you need to know to grow your profits and minimize your risks.
What Is Yield Farming?
For first timers, yield farming sounds complicated but it is actually quite simple. Its name echoes the analogy of farming as it allows you to grow your crypto. In essence, yield farming involves putting your crypto assets into a pool for specific decentralized finance (DeFi) protocols.
Traditional banking institutions use a similar concept, where they take deposits, lend them out to borrowers, and then pay interest to depositors. In the same way, yield farming rewards users for providing liquidity to the protocol based on their liquidity contributions and the underlying protocol’s conditions.
It’s crucial to keep in mind that yield farming can be risky as you’re investing in complex and volatile DeFi protocols. Therefore, you need to go over everything with a cool head and a fine-tooth comb before jumping into a project.
How to Get Yield Farming Rewards
Yield farming rewards users who benefit the protocol in some way. You can do this in a number of ways:
Pool liquidity into a contract to enable market formation
Add liquidity to become a more influential market maker or to receive a discount
Pool votes
Lock up certain assets
Depending on the platform, the yields may take the form of a percentage from transaction fees charged by the platform, interest earned from lenders, or governance tokens.
What Is a Crypto Liquidity Pool?
Generally, a liquidity pool consists of crypto tokens that are secured under a smart contract. Decentralized exchanges rely on these tokens for liquidity. The term “liquidity” refers to the ease of exchanging crypto tokens for one another. Having this ease is vital for the DeFi ecosystem given that it facilitates financial transactions.
Despite the fact that there are a great number of liquidity pools in the DeFi sector, only a few have established themselves as investors’ top choices.
Listed below are the top 10 pools by TVL according to DeFi data aggregator DeFi Llama.
PoolProjectTVL APY 30-Day Avg APYSTETH Lido$14.777 billion3.80%3.80%BTC JustLend$3.015 billion0.02%0%CBETH Coinbase Wrapped Staked ETH$2.209 billion3.33%3.33%RETH Rocket Pool$1.59 billion3.32%3.32%WSTETH AAVE V3$788.32 million0.01%0.01%WBTC AAVE V2$722.39 million0.07%0.07%FRAX-USDC Curve DEX$620.65 million1.30%0.01%ETH-STETH Curve DEX$581.69 million2.04%2.04%WETH AAVE V2$566.63 million1.15%1.15%FRAX-USDC Convex Finance$549.43 million1.96%1.96%
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What Is Total Value Locked (TVL)?
To put it simply, Total Value Locked (TVL) measures the total value of assets locked in DeFi protocols. TVL includes all digital assets held in DeFi protocols, including staked coins, lending funds, and liquidity pools.
According to CoinMarketCap data, the total locked value of liquidity pools in yield farming projects as of this writing is $5,231,073,393.02.
What Is APY?
APY stands for Annual Percentage Yield, which refers to the return on an asset when compound interest is applied, or the return on a deposit when accumulated income is reinvested. APY is a universal metric that serves as a way to count expected revenue and compare yields from staking or liquidity pools of token pairs.
APY is usually inversely related to TVL, which means that APY decreases as the number of locked assets increases.
If you want to see which pools offer the highest APYs, sort them by it on the DeFi Llama aggregator mentioned above or CoinMarketCap as shown below.
Source: CoinMarketCap
Remember, though, that juiciest APYs usually come with the greatest level of risk.
Is Yield Farming Risky?
In yield farming, there is the risk of impermanent loss. Typically, this occurs when the value of a locked crypto asset decreases. The goal of yield farming is to maintain a balanced proportion between paired assets. Additionally, smart contracts used to lock assets in yield farming pose a risk of hacking. Furthermore, rug pulls can occur, which are a type of fraud in which scammers launch a project, attract investors, but stop the project before it starts and take all of the funds. So it’s important to be aware of the risks involved and do your own research before investing in any yield farming project.
What Is Staking?
Crypto staking involves locking tokens into a blockchain network that uses a Proof-of-Stake (PoS) consensus for verifying and securing transactions. It is similar to an interest-bearing bank account with a predetermined maturity date.
How Does Crypto Staking Work?
Basically, there are three main stages in the staking process.
A crypto investor stakes their assets in their crypto wallets with stake functionality, or on centralized or decentralized exchanges, allowing the network to use them.
The information is registered in a new block and validated using the investor’s holdings.
The network rewards the staker for making their holdings available for validation.
Is Staking Risky?
Staking is not subject to impermanent loss like yield farming. Staking’s main risk is hacking attacks. Next, there is the volatility of crypto asset prices, which means that the value of the user’s coins or tokens can go up and down rapidly, making it difficult to predict the total return on investments.
Where to Buy Crypto for Yield Farming and Staking
On StealthEX, a wide range of crypto coins and tokens are available for purchase and exchange, including Bitcoin (BTC), Ethereum (ETH), and stablecoins like USDC, which can then be used for yield farming and crypto staking.
You can buy them for fiat by going to the Buy Page, picking the fiat currency and crypto that you want, and entering the amount of fiat that you want to spend. Click the Start Exchange button.
After that, enter your crypto wallet address and click Next.
Once you’ve done that, read and accept privacy policies and terms of service of StealthEX’s fiat providers.
Fill out the email field and click Continue.
Then, fill out the KYC form, a requirement of all fiat-crypto processors. Уou can purchase an amount of crypto without KYC if it’s less than €700 or the equivalent of this amount in other currencies. As long as your total purchases don’t exceed €700, you don’t have to verify your identity. You can make one big purchase or several small €20, €50 or €100 transactions.
To complete the transaction, enter your payment details and click Pay.
It’s really that simple. Within a few minutes, you’ll have your crypto coins or tokens in your wallet, available for yield farming or staking.
Final Words on Yield Farming vs Staking
Both yield farming and crypto staking are great methods for earning passive income in the crypto world. In both methods, solid returns can be expected, but yield farming offers greater returns, but is riskier. Before deciding which option to go with, make sure you do your research.
Tags: crypto passive income cryptocurrency staking staking crypto yield farming
The post Yield Farming vs Staking: An Ultimate Guide on Crypto Passive Income first appeared on StealthEX.
Filed under: Bitcoin - @ July 19, 2023 1:25 pm