Welcome back to our staking course at Cryptology!

We hope you have been enjoying this educational course and are feeling more confident with staking crypto. In this next entry we will look over the differences between yield farming and staking crypto. Both of which are popular means to create passive income with crypto but in some ways are different. 

With anything related to crypto, only invest your capital if you’re certain you understand the fundamentals. Be sure to always do your homework as crypto markets can be a rocky landscape especially for less experienced traders.

Let’s look into them both in more detail so you can work out which one is best for you.

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Understanding Yield Farming

Yield farming or liquidity mining involves users providing liquidity to decentralized exchanges (DEXs) or lending platforms in exchange for rewards. 

Some of the most popular platforms to yield farm on are:

• Uniswap
• PancakeSwap
• SushiSwap
• Harvest Finance
• Aave
  

Users contribute their crypto to a liquidity pool found on decentralized exchanges and platforms. These pools are smart contracts that have set rules such as the lockup periods and returns for rewards distribution.

For participating, users then receive tokens in the form of LP tokens that can be redeemed for crypto or reused in the liquidity pool.

While both staking and yield farming require levels of knowledge, it’s to be made clear that staking is more user friendly. You need to actively manage your funds to remove the chances of impermanent loss. 

Yield farming is non-custodial also, as it’s only found on DEXs and platforms. This means you the user have control over your private keys but this in turn results in you having more responsibility.

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Staking In Crypto Explained

We have covered crypto staking in some detail in our previous courses. 

For those that haven't, crypto staking is the act of locking up your funds on an exchange or staking platform for a reward. 

Cryptology offers great staking options on some of the best crypto tokens. We offer upwards of 21% APR returns on tokens like Ethereum, The Graph and Solana. Our staking is incredibly flexible too giving you full access to your funds as and when you please to minimize risk.

We have a dedicated staking dashboard for our users where you can track your earnings by the day. Your rewards are generated and can be withdrawn or restaked to increase your collateral for increased potential future returns.

When staking, your funds act as collateral on a blockchain as they validate transactions. Staking is pivotal as it allows transparency and security on a network. If invalid transactions are validated then your funds are slashed and taken to pay for the damages. 

Proof of Stake is the consensus mechanism behind staking and aims to be a more efficient predecessor of Proof of Work originally made for Bitcoin. Now rather than computing power determining mining rewards, it’s based on the amount staked.

To learn more about staking visit our academy today.

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Key Differences: Yield Farming vs. Staking

Now that we've explored the basics of yield farming and staking let's compare these two methods in more detail:

Yield Farming

Risk and Complexity

• Higher risk and complexity due to exposure to impermanent loss and the need for active management.
• Requires a deeper understanding of the projects being farmed on.
  

Rewards

• Rewards are often in the form of governance tokens.
• There is potential for higher short-term gains but with increased volatility.

Flexibility

• Yield farming offers more flexibility in terms of liquidity provision and withdrawal.

Staking

Risk and Complexity

• Lower risk and complexity compared to yield farming.
• It involves less active management, making it more user-friendly for beginners.
  

Rewards

• Rewards are typically in the form of additional tokens issued by the network.
• Provides a more stable and predictable income stream.
  

Flexibility

• It may have longer lock-up periods, reducing short-term liquidity but offering stability.

The Drawbacks of Yield Farming and Staking

While yield farming and staking are great ways to make more from your crypto there are some drawbacks to consider. These will help you to decide whether they’re a good option for you.

Price Fluctuation

• The value of your tokens can fluctuate which may pose a problem. It will affect your overall rewards and of course the value of your initial investment.

Platform Security

•  All crypto platforms can be attacked by cyber attackers and there is the possibility that founding teams are illicit. This leaves your funds at risk if you choose the wrong platform, be sure to do your own research.

Token Security

• Across the board, non-custodial DeFi options like staking and yield farming bring bigger risk to losing tokens. You control the private keys ultimately putting more responsibility on you as the investor.
  

Gas Fees

• Gas fees are synonymous with crypto trading. They go towards paying for transactions on a network and can be quite high depending on the token and time you execute the transaction.

Staking and Yield Farming - Final Thoughts

Overall both staking and yield farming are a great way to generate passive income when investing in cryptocurrencies. 

Both of which follow similar principles in locking up your funds on a platform, but of course there are discrepancies and differences. The future for these concepts are bright as more users are onboarded onto the blockchain and both will become more popular.

It must be advised that staking is much more user friendly for beginners to enjoy but of course you’re free to choose the best option for you!

Be sure to visit the Cryptology Academy today to learn more about crypto and blockchain!

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