Staking Vs. Farming - How To Optimize Your Passive Income

By Bfab | Good vibes | 23 Feb 2022

Before talking about how much you can earn, it is worthwhile to define these terms:

Staking consists in locking coins into a blockchain to earn proof-of-stake rewards.
Farming consists in locking coins into a DeFi protocol to earn yield farming rewards.

How much can you earn with staking of farming?

The staking rewards for the top 10 cryptos by staked value (source: stakingrewards.com) are:

SOL: 6%
ETH 2.0: 5%
ADA: 5%
LUNA: 8%
AVAX: 9%
DOT: 14%
BNB: 8%
USDC: 8%
DAI: 7%
ATOM: 14%

Therefore, the highest staking rewards you can get are with DOT and ATOM, with 14% p.a. However, as the inflation rate is 10% for DOT and 6% for ATOM, the adjusted rewards are respectively 4% and 8% for each of these tokens. Comparing with the other staking coins, which also have inflation rates (e.g., 32% for AVAX), ATOM is the most profitable staking coin.

The yield farming rewards go from from a few % to several billion % per year. However, the higher the rewards, the more unstable the coins. For instance, most of the protocols offer high yield rewards at the beginning to attract liquidity. Once the liquidity has been injected into protocol, the yield rewards decrease and hence the farmers go away, what significantly reduce the value of the coins involved in these liquidity pools since they are sold. Furthermore, for the dual asset liquidity pools (i.e., most of the farms), the impermanent loss greatly reduces the actual rewards, and calculating the real income or loss is really challenging.

What are the risks of staking or farming?

The main risk with staking is the slashing, which punishes dishonest or lazy validators and their delegators (i.e., you who staked coins at this delegator). For instance, the Cosmos Hub slashed a validator for double-signing and 5% of all the ATOMs delegated to their node were slashed. In summary, you can lose 5% of your delegation if you choose the wrong one.

The main risks with farming are rug pulls and smart contract failures leading to exploits. The main reason is that most of the investors do not or cannot read smart contracts. They have to trust audits (if they have been done) which do not guarantee that it is 100% safe. You can lose all your coins if you choose the wrong DeFi protocol.

Therefore, staking requires to check validators and involves a 5% risk, whereas farming requires to check smart contracts and involves a 100% risk. In terms of risks, staking is definitely a better option than farming.

In summary, what is the best strategy: staking or farming?

For short term investors looking for high rewards and accepting high risks, farming might be the best option. For longer term hodlers looking for reasonable rewards with nearly no risk, staking is a better option. For instance, staking ATOM or EGLD provides reasonable rewards with nearly no risk.

Disclaimer: None of the above-mentioned projects, protocols, coins or tokens are financial advices. Please Do Your Own Research before investing.

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