Yield Farming vs Staking: Six Differences You Should Know

October 28, 2022
5 min
cryptocurrency

Explore the differences between yield farming vs staking. Find the best solution for passive income crypto investing based on risk tolerance and goals with Xverse.

As the crypto market continues to boom, an increasing number of people are looking to drive passive income through investing. However, finding the right path forward can be a challenge, even for those with a solid understanding of cryptocurrency. 

Yield farming and staking are two common passive income avenues for those looking to benefit from interest rates while avoiding the risks that can come from actively trading crypto. Popular among those who prefer to hold onto their investments rather than staying engaged in the market, these strategies can encourage growth in a stable, sustainable way. 

In spite of the growing fanfare surrounding these opportunities, it's important to note that they're not the same thing. Crypto farming vs staking means unique pros and cons to weigh carefully before proceeding. 

What Is Yield Farming?

Yield farming, named for the way this tactic can grow holdings in a way akin to growing crops, is an opportunity to generate returns by lending assets to decentralized finance, or DeFi, platforms. These assets are then held in a liquidity pool and are used for borrowing, lending, and trading. This process accumulates fees from those using the pool, as well as accruing interest. These earnings are then paid out to individual investors. For this reason, yield farming can also be called liquidity mining. 

What Is Staking?

Staking is another passive income pathway, in which users pledge, or stake, crypto assets to support a blockchain network. This effectively adds new blocks to the network as well as establishing validation through consensus mechanisms like Stacks proof of transfer. In essence, staking helps to safeguard a blockchain from cyber attacks, providing a layer of security that investors benefit from. Users then earn incentives and a share of the platform's fees for doing so. Staking pools can have a very low barrier to enter, which makes them ideal for newer investors. Xverse, for example, requires a minimum of just 100 STX.

Yield Farming vs Staking: 6 Key Differences

On the surface, the passive income benefits of yield farming vs staking seem relatively similar. However, there are six key differences investors should consider. 

1. Investment Duration

For those considering staking, it's important to note that this process usually involves locking assets in for a set period, which can make them inaccessible. Yield farming does not, ensuring a higher level of liquidity.

2. Impacts of Inflation

Inflation affects the crypto space in a way similar to traditional assets. Yield farming doesn't benefit investors when the market value increases, but staking generates crypto in exchange for participation in the blockchain, which is subject to inflation like any other holdings. However, both options can be preferable to leaving crypto sitting untouched in a wallet.

3. Associated Costs

Depending on the strategy, both of these methods can be low-cost endeavors. However, yield farmers who move assets between liquidity pools to maximize returns can face transaction fees, which will eat into profits. 

4. Asset Security and Investment Risks

While both methods are generally safe to pursue, yield farming relies on newer technology that may make it more vulnerable to malicious players, bugs, or glitches if the wrong platform is used. In addition, yield farming tends to involve a larger initial investment, requiring more of an upfront commitment. The proof of transfer consensus mechanisms used in Stacks staking, on the other hand, provides inherent security, and commitment requirements are usually far less. When using Xverse Pool, the minimum amount to enter is just 100 STX – an affordable starting point for even beginning investors. 

5. Chances of Impermanent Loss 

Impermanent loss, or losses due to price fluctuations, are far more likely to impact yield farmers as they're no longer in possession of tokens. If prices rise while assets are in a liquidity pool, the owner doesn't get the benefit of said growth. Staking, however, is not subject to impermanent loss as tokens are pledged, not transferred. 

6. Profitability

For most investors, profitability is a top priority. Yield farming can be the most flexible, as APY can vary based on liquidity pool and investors can move money on demand. Staking is more consistent, with a set APY, but longer durations can mean more profit.

Main Advantages of Yield Farming + Ideal Users

The main advantage of yield farming is the earning potential. With the ability to select liquidity pools based on return potential, like getting involved early in liquidity mining for new projects, users can earn big; newer pools tend to incentive participation with sky-high rates. 

However, as illustrated above, the risks are higher than staking, including impermanent loss and potential vulnerabilities. Costs can be higher, too, and a larger investment is usually required to get started, which may scare off those new to the crypto space who are still building a portfolio.

As such, yield farming could be more optimal for those with a high-risk tolerance and time to dedicate to researching the best possible outlets. 

Main Advantages of Staking + Ideal Users

High yield crypto staking, on the other hand, is a lower liability activity. Assets invested are safer without any of the risks of a potentially vulnerable platform. In addition, initial investment amount is lower, making it more accessible to those who don't want to lock up a substantial amount of assets. Interest rates are set, too, so investors can have an idea of their returns without the need for ongoing market research. There's no risk of impermanent loss or losing out due to inflation, either. 

This aside, the duration can be a concern for those who aren't sure about a big commitment. Assets aren't immediately liquid, which means accessing them if a need arises is a challenge. 

With these factors in mind, staking may be a comfortable choice for those who are more risk averse, are new to crypto and aren't up to more research-heavy endeavors, and want to start with a small investment. When done right, the profitability can be well worth keeping assets locked up.

There's a lot to know about investing in cryptocurrency, and that includes passive income opportunities. Whether yield farming or staking is the right choice, there are options for every risk tolerance and earning objective. While staking is a safer bet, yield farming can be very tempting for the right investors. 

No matter which choice makes the most sense for you, Xverse is the right resource to help. Read the Xverse blog for product updates and news in the Bitcoin ecosystem or download the app if you’re ready to get started.

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