Staking Crypto vs. Yield Farming
Yield Farming Crypto: DeFi Liquidity Mining Strategies
Engaging as a liquidity provider (LP) is often the initial step in crafting a yield farming strategy. However, liquidity providers do not fully embrace yield farming until their LP tokens are optimized by being staked into multiple protocols and/or pools. Typically, liquidity miners distribute tokens across various liquidity pools and decentralized exchange (DEX) protocols.
Consider a straightforward yield farming strategy:
- Deposit CAKE and BNB into the CAKE/BNB liquidity pool on PancakeSwap.
- Obtain CAKE-BNB FLIP tokens.
- Stake CAKE-BNB FLIP tokens into the corresponding CAKE crypto liquidity pool to enhance returns.
The DeFi liquidity mining landscape is rich with such staking or farming opportunities, with new pools and protocols emerging daily. Yield farmers can stake their LP tokens across different protocols and liquidity pools for durations ranging from a few days to several months.
Staking Crypto vs. Yield Farming
Although yield farming and staking crypto are distinct practices, they are often confused with one another. Yield farming, also known as liquidity mining, involves earning rewards by utilizing cryptocurrency holdings within various DeFi protocols. In contrast, staking is primarily associated with the consensus mechanism of a Proof-of-Stake (PoS) blockchain network, where participants earn rewards as part of the network’s validation process. While staking does yield returns, these are generally lower compared to the rewards offered by DeFi yield farming protocols. Typically, staking yields range from 5% to 15% annually, whereas yield farming rates in crypto liquidity pools can surpass 100% and offer continuous payouts, allowing for withdrawals at any time.
Despite the higher potential returns, crypto yield farming comes with increased risk. For instance, on Ethereum, gas fees required to claim rewards can diminish earnings from annual percentage yields (APY). Additionally, market volatility can lead to impermanent loss, where the value of tokens in a liquidity pool decreases relative to their value on the open market. Furthermore, the reliance on smart contracts introduces the risk of vulnerabilities being exploited by hackers.
