SHORT ANSWER: Well, it depends on your investment goals, risk tolerance, and knowledge of the DeFi ecosystem. Both yield farming and staking allow users to make significant returns with varying levels of passiveness on their crypto, which would otherwise sit idle in a wallet.
Is Yield Farming the Same as Staking?
While yield farming and staking are popular decentralized finance (DeFi) investment strategies, they have different implications, risks and associated rewards. A solid understanding of both allows you to make the right decision for crypto investing needs. Let's get you in the know.
What is Yield Farming?
Yield farming is an investment strategy where users deposit cryptocurrency into DeFi platforms to earn fees and interest. Anyone who owns crypto can do this, and the most common ways to yield farm involve providing liquidity and lending services on DeFi platforms. You receive dynamic yields that vary on the action and current market conditions by providing these services. Yields can range from 3.5% to 50% APY and higher, outperforming many traditional passive income strategies. With the explosive growth of DeFi, yield farming opportunities continue to increase, giving crypto holders diverse choices to maximize their holdings.
What is Staking?
Staking is locking cryptocurrency for a set time to validate block data in proof-of-stake blockchains. When you stake crypto, you become a validator for the network, ensuring that valid transactions are added to the blockchain. If stakers, aka validators, do this successfully, they can earn digital assets as rewards. If they improperly validate transactions or do other malicious activities, the validator is slashed, losing some or all of their investment. Don’t worry; you don’t need to be a technical wizard to do this. If you don’t want to run your nodes, many platforms provide third-party services, allowing users to stake crypto seamlessly. Staking is often compared to depositing money in a high-interest savings account, as the Annualized Percent Yields (APYs) are similar.
Yield Farming vs. Staking: Benefits and Risks
Yield farming and staking earn passive income on crypto holdings. While both strategies involve employing crypto assets to generate returns, they differ in their underlying mechanisms, returns and risk. By understanding the differences between yield farming and staking, you can decide which is best for you.
| Crypto Yield Farming | Crypto Staking | |
| Pros | Semi-passive incomeHigher yieldsDiverse earning opportunitiesMore control over your assets | Relatively passive incomeFixed APYLow barrier to entrySupport network security |
| Cons | Requires more knowledge and strategy than staking Potential for impermanent loss when providing liquiditySusceptible to smart contract bugs and hacks. Yields are dynamic and fluctuate up or down from various factors — token volatility, liquidity pool supply and demand and gas fees | Token volatility can decrease returnStaked tokens cannot be withdrawn for a set periodLower APY compared to yield farmingRisk of being slashed |
Yield Farming vs. Staking: Key Differences
Accessibility to Assets
A key consideration that makes yield farming attractive to many over staking is that users have more control over their assets. When you deposit crypto to DeFi platforms to yield farm, you can withdraw it immediately. When staking, crypto is sometimes locked for days, months, and even years. Liquid staking has emerged as a popular alternative to traditional staking, allowing users to receive staking rewards and have the flexibility to access their assets. However, only a limited number of networks like Ethereum, Polkadot, Avalanche, Cosmos and Cardano have liquid staking protocols, making traditional staking more accessible.
Return on Investment (ROI)
Yield farming attracts many with higher yields compared to staking. For instance, by providing liquidity into a pool on UniSwap, users can earn a percentage of each transaction made in the liquidity pool. Liquidity provisioning can earn up to 25% APY or more, which can be profitable. Cryptocurrencies like Bitcoin can be volatile and fluctuate in price frequently. The APYs displayed to you when you begin yield farming constantly move with the market. For instance, the supply and demand in liquidity pools, gas fees and token prices can change your APY daily. With staking, the APY remains constant, but the asset’s underlying price changes affect your returns. Investors seeking stable returns tend to favor staking for this purpose. Most yield farms average around 5% to 50% APY returns, whereas staking is 1% to 7% APY returns.
Risks
Yield farming and staking have risks that investors must consider. While yield farm returns are lucrative, impermanent loss is a common risk when providing liquidity to DEXs – the most popular yield farming strategy. Decentralized exchanges (DEXs) like Uniswap use Automated Market Makers (AMMs) to fulfill their order books. AMMs use smart contracts to routinely rebalance tokens in a liquidity pool to maintain a 50/50 balance. When one of the pooled tokens decreases in value, the smart contract will automatically sell the other token to purchase the token (depreciating in value) to maintain equal balance. This phenomenon is called impermanent loss – the difference between holding two assets versus providing liquidity with those assets.
One common risk of staking is token volatility. When you stake tokens, the protocol will lock up your tokens to validate transactions, securing the network. During this lockup period, you won’t be able to sell or trade your staked tokens. If the staked token’s price drops, your return will diminish. While the APY doesn’t change, the assets you receive as a reward for staking are less valuable, giving you a lower dollar return. Conversely, your dollar return will increase if the token price goes up.
Additionally, you can be slashed, losing a portion of your staked tokens, if the network encounters an issue or you fail to meet specific staking requirements. Familiarizing yourself with the protocols' staking requirements and maintaining compliance can minimize the chance of being slashed. If you use a third party to manage your staking, ensuring it is a credible platform will mitigate your chances of being slashed.
DeFi platforms rely heavily on smart contracts to run their protocols in a safe and permissionless manner. While unlikely, smart contracts can be hacked or contain bugs, leading to a loss of deposited assets for yield farming and staking. The best option to minimize this risk is to use reputable platforms with high total locked value (TVL).
Yield Farming vs. Staking: Similarities
Passive Income
Both yield farming and staking allow cryptocurrency holders to maximize their holdings and earn passive income on their assets. Through yield farming or staking, holders can use their tokens, which would otherwise earn nothing, to generate an extra income stream without active trading.
Supporting the DeFi Ecosystem
Users play a crucial role in fostering the development and adoption of decentralized applications (dAppa), contributing to a more open, transparent and accessible financial system. By providing liquidity and lending services or securing proof of stake networks, you help contribute to a protocol’s success. Both investment strategies can benefit the user and the network, making decentralization valuable and effective.
High Returns
Yield farming and staking can provide higher returns than traditional investment vehicles depending on your risk tolerance, capital deployed and market conditions. Staking stablecoins can provide returns as high as 17% APY with the same level of risk as a high-yield savings account getting 3.5% APY. Providing liquidity in certain pools can provide explosive returns but carry more risk.
Is Yield Farming Better Than Staking?
Crypto investors tend to favor yield farming because of the higher returns, but they incur more risks than staking. Ultimately, the choice between yield farming and staking depends considerably on an individual's investment goals, risk tolerance and level of involvement in the process.
Yield Farming vs. Staking: Who is it Suitable for?
Yield farming requires more research and insight into the DeFi ecosystem than staking, making it more suitable for active crypto users. With staking, the barrier to entry is much lower, and third-party brokerages can make the process completely passive, making it attractive for beginners. Staking is also a more suitable choice for investors who prefer a passive long-term approach, while yield farming is better for those who want higher returns and understand the risks involved.
How to Choose Between Staking and Yield Farming
Whether to yield farm or stake is determined mainly by the individual’s investment goals, risk tolerance, experience level and the tokens they want to hold. Risk-averse, long-term investors who like to set and forget should consider staking their tokens. With third-party brokers managing the staking process on behalf of the user, staking can be a passive way to maximize holdings.
However, with staking, you sacrifice liquidity in positions while your tokens are locked up. Investors who prioritize the ability to access their assets quickly should choose a yield farming strategy that aligns with their preferred risk tolerance. Investors with more knowledge of the DeFi ecosystem seeking higher returns could also opt in to yield farms. Yield farming typically requires more active management of positions since returns are more volatile but if done correctly can yield higher rewards.
Some of your tokens may not be available to yield farm or stake. For instance, Bitcoin cannot be staked because it uses a proof-of-work consensus mechanism. Only tokens whose protocol uses proof of stake consensus can be used to stake. Understanding the functionalities of the tokens you own or plan to purchase will help you determine which strategies to use.
Where to Yield Farm
To begin yield farming, purchase cryptocurrencies to deposit onto DeFi platforms. You can do this on centralized exchanges like Coinbase or decentralized exchanges like Uniswap. Once you have crypto, you’re ready to farm. Some of the most popular platforms to yield farm include:
- Uniswap: DEX on Ethereum where users can provide liquidity in a variety of pools
- SushiSwap: DEX that is a fork of Uniswap offering staking rewards and liquidity provisions
- PancakeSwap: DEX on the Binance Smart Chain (BSC), where users can provide liquidity, bolstering lower gas fees than Ethereum
- Curve Finance: A DEX with a unique AMM, making it popular among liquidity providers and swappers
- Aave: One of the leading decentralized lending platforms allowing users to borrow and lend ERC-20 tokens like Ethereum
uni
Uniswap$8.80*
*prices delayed up to 10 minutes-4.00%
24HDisclosure: eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.
sushi
Sushi$0.747927*
*prices delayed up to 10 minutes-6.00%
24HDisclosure: eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.
cake
PancakeSwap$1.89*
*prices delayed up to 10 minutes-3.00%
24HDisclosure: eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.
crv
Curve DAO$0.322572*
*prices delayed up to 10 minutes-8.00%
24HDisclosure: eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.
aave
Aave$163.25*
*prices delayed up to 10 minutes-4.00%
24HDisclosure: eToro USA LLC; Investments are subject to market risk, including the possible loss of principal.
Where to Stake Crypto
In 2024 staking crypto has never been more accessible. Many centralized exchanges offer built-in staking features, allowing you to easily stake your tokens directly from your exchange or wallet. Here are some of the most popular platforms to do so:
- Coinbase: A user-friendly CEX that allows you to trade and stake coins seamlessly within the platform. Coinbase boasts one of the smoothest interfaces across centralized exchanges and an unparalleled user experience.
- Binance.us: By market volume, Binance is the largest CEX, offering over 100 staking tokens. Complemented by a simple user experience Binance.us is one of the best options to stake crypto.
- Kraken: Allows you to trade and stake coins easily within the platform. Kraken offers competitive staking rewards for a variety of tokens and a clean user experience.
Bottom Line for Yield Farming and Staking
Yield farming and staking are two powerful ways crypto holders can maximize their holdings. Both strategies are accessible to anyone who owns crypto, and with the growing adoption of DeFi and institutional interests, there is no shortage of opportunities. Yield farming popularized by high APY returns requires more attention and a deeper understanding of the DeFi landscape. Staking is generally more stable and straightforward, thanks to in-app capabilities on many exchanges. Both staking and yield farming carry risks and rewards that vary widely. With an array of yield farm and staking options, crypto investors should do their homework, making educated decisions to maximize their holdings.
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About Gianluca Miller
Gianluca Miller’s crypto journey started in 2019 when he sought alternative assets to diversify his investment portfolio. With a keen interest in innovative technologies, he became increasingly involved in Web3 through trading crypto and participating in DeFi protocols. Over the last few years, he has become a blockchain evangelist, fascinated with the tech’s utility and impactability. Gianluca contributes to Benzinga, is working on a Defi research project through Blockchain UCSB, and continues to expand his Web3 acumen daily. He loves learning, analyzing new projects and market conditions, and building relationships with industry leaders.