With the massive expansion of cryptocurrency over the last few years, protocols that earn passive income have come into the spotlight. Staking and farming are two of the most popular protocols. The main difference between Staking and Farming is the act it’s playing on the blockchain. Staking is the simpler act of locking X cryptocurrency up for Y period of time in order to earn rewards, such as network fees. On the other hand, farming is a more complex strategy-based method where farmers utilize the best liquidity pools in decentralized finance to maximize returns. So, crypto farming vs staking? Let’s learn the difference!
What is Crypto Staking?
Staking is the act of locking up cryptocurrency for a defined or undefined period of time to receive rewards. Staked cryptocurrency is typical for the Proof of Stake consensus mechanism that many large blockchains use today, and is the backbone for validating and securing each block on the network.
Usually, staked cryptocurrency will be locked up with the validator of your choice. Your staked cryptocurrency then represents a certain percentage of the validators pool. If you have a staked amount equal to 7% of the pool, you will receive 7% of the rewards.
The rewards from staking are based on network fees, but each platform can offer different benefits and APY depending on their goal. It is now possible to stake cryptocurrency on centralized exchanges.
How Does Crypto Staking Work?
Cryptocurrency staking is part of a complex Proof of Stake mechanism, where validators are randomly chosen, based on certain metrics such as tokens staked, to validate the upcoming block. However, becoming a validator often requires a large amount of liquidity upfront in the network’s native token.
Ethereum validators for example are required to lock up 32 Ethereum to become a validator, which is over $90,000. For this reason, Proof of Stake allows all token holders to contribute a much smaller amount of tokens to a validator of their choice, to put their tokens to work.
When you commit your tokens to a certain validator, you will receive a percentage of their rewards based on your contribution. However, you are also liable to face their consequences. Slashing events can occur to punish validators for bad behavior, such as excessive offline time. Slashing events can slash a percentage of the fixed amount of the staked cryptocurrency away, applying to the validators as well as you, the delegator.
What is Crypto Farming?
Crypto farming, also known as yield-farming, is the generation of rewards through the staking of assets on DeFi, utilizing dApps. The difference between farming and staking is the location. Yield farming is only possible on DeFi liquidity pools, utilizing decentralized exchanges.
Farming is similar to staking, as crypto is provided to liquidity pools and rewards will be granted in return. However, yield-farmers are often a lot more active in their pursuit for the highest yields, utilizing liquidity from one pool for another, through lending and borrowing protocols. To be a successful yield-farmer, you must have a sound strategy in place and be attentive to changing reward rates.
How Does Crypto Farming Work?
Yield farming works through the use of smart contracts, which are the basis of the DeFi eco-system. Farmers will constantly utilize different lending marketplaces to maximize their yield in the best pools at the time.
Yield-farmers will deposit their crypto assets into a liquidity pool, which is running a decentralized borrowing, lending and exchange marketplace for its users. When users interact with the marketplace, they pay fees passed on to the liquidity provider. In this case, the yield-farmer receives a thank you for providing liquidity.
The marketplaces are automated market makers, the backbone of liquidity pools in DeFi and therefore, yield farmers.
Rewards can range from the same pair of tokens provided to the pool, network fees or unique tokens to the blockchain for being an early liquidity provider. Yield farmers are often indirectly essential to the early success of up and coming blockchains in need of liquidity.