Almost everyone love getting rewards for free. Especially in era of DeFi bloom. There are multiple mechanisms and tools to achieve so called passive income, some of them are a hassle, while others are simple. In todays article I'll try to guide You through:
- Risk and rewards associated with staking
- Methods of staking
- Platforms and apps you can stake your favorite crypto from
- Difference between APY and APR
- Differences between staking and yield farming
Risk and rewards of staking
Idea of free, riskless money should almost immediately scare you off, since money in circulation is limited (Still the amount is immense) there's always a giver and a taker in exchange world. Because that's what it is, you always exchange money for stuff, or otherwise. But staking isn't exactly free and riskless.
First of risk you should consider is amount of time required to achieve reasonable profits. Higher percentage of daily, monthly or yearly rewards isn't always the best advisor. You should always think about bigger picture when seeking profits from staking long term.
What I mean by that - Is the protocol you are staking on is safe? Is it reliable? How does it generate the yield you are getting? How many people use it? Will the price of its token increase or decrease? The last one is tricky but often not very hard to answer if you do a proper research. All of these questions are potential risks and before staking you should try to answer all of them, it helps relief the stress and staking is somewhat stressful in some cases.
Here's a great website which will provide almost on information on how the chain is profitable, the differences in gains, the real income percentage and ways to stake your coins.
The great idea of staking is rewarding protocol users for their engagement in the network. It depends on what you are staking, but very often the engagement requirement is almost non existent. It is for sure a great way of generating income but the main requirement is time.
Different chains have different ways to stake your coins. You can also try a centralized exchange staking, I recommend biggest players in the space, such as Binance, non-ref, and Coinbase, non-ref.
Platforms and apps you can stake your favorite crypto from
If you are a Ledger owner, you can see their dedicated tutorials on how to stake. Here's an example tutorial on how to stake Ethereum with ledger.
If you are using a hot wallet, e.g. Metamask, you simply need to connect to a Dapp and you can begin staking.
If you are a Cardano holder, you can stake from a dedicated tab which is found in most of current hot wallets, e.g. Yoroi or Nami wallets.
For BNB chain, I recommend their wallet which can be found here. You can find a delegator and stake here, but it's also good to stake directly at Binance.
Tron network offers a plentiful of wallets you can choose directly from their website, here.
What is the difference between APR and APY?
APY - Annual percentage yield and APR - Annual percentage rate.
The main difference between those two is while calculating APY, you are also accounting in the compound interest you generate. It may sound insignificant but the margin of difference of your yield expand exponentially with the increase of interest gain frequency.
Here's a short video which will exactly explain the differences.
Differences between staking and yield farming
Yield farming is often found on DEX'es and CEX'es. It is a very profitable task of providing two coins which are available to trade on the platform. Providing both of them creates a liquidity that secures and sustains the trading pair. In order to maintain the operation of markets and incentivize holders to provide liquidity trading has fees. Those fees are distributed to liquidity providers and creates a process called yield farming.
This strategy is often profitable but carries risk such as one of the coins suddenly going down or up in value, which may cause decrease of amount of your crypto of choice if you decided to stop yield farming. E.g. you are providing liquidity for a pair of BTC/USDT, you started farming by providing 20.000 USDT and 1 BTC because price of Bitcoin was 20.000 USD at the moment
If Bitcoin price went down to 15.000 USD and you decided to quit providing liquidity, you will encounter a additional loss of approximately 1.03% of your position value. This only increases in scenario if both of your liquidity tokens go down in value.
You can calculate impermanent loss here.
There are multiple reliably safe protocols which offer liquidity farming pairs like USDT/USDC, USDT/BUSD etc.
Those don't offer too high returns but in case of markets going down you will be safer than in other scenarios.
Staking only requires you to hold one token, but usually wont offer higher than 5-10% APY. It is reliably safe and when considered long term, it may prove superior to liquidity farming.
If you have your favorite Cryptocurrency, staking may prove to be a very lucrative thing to do. I myself am staking multiple coins, both on CEX'es and in hot wallets, I have tried yield farming but this task proved to be too hard for me and I finally decided to give up. You can share your experience with staking and yield farming in the comments, I would love to know about it and my article!
None of information in this article should be considered a financial advice, it's my own analysis and facts I wanted to share with this wonderful community.