If you are into the crypto space, you must have surely come across terms like staking, yield farming, liquidity mining, and even liquid staking. But do you actually know the difference between them? If yes, then congrats, you are a degen – just like the author of this article. If not, read ahead.
As blockchain and DeFi have evolved, so have the ways for you to earn money with your crypto and other digital assets. Each of these methods allows you to put your digital assets to work and generate rewards. Rather than wait for your digital assets to generate profits by HODLing them in your wallets passively, you can put them to work.
While these methods share some similarities, there are also key differences among them. Let’s learn more about them so you can make a choice that best aligns with your goals.
As blockchain and DeFi have evolved, so have the ways for you to earn money with your crypto and other digital assets. Each of these methods allows you to put your digital assets to work and generate rewards. Rather than wait for your digital assets to generate profits by HODLing them in your wallets passively, you can put them to work.
While these methods share some similarities, there are also key differences among them. Let’s learn more about them so you can make a choice that best aligns with your goals.
Staking: Earning Rewards for Holding Digital Assets
Staking is a way for you to earn rewards with the crypto assets you already own. All you have to do is lock up your tokens in a wallet to help secure the network. In return, you get rewards. Easy enough, right? With staking, your tokens never actually leave your wallet. They are just held as collateral to help the network operate securely and efficiently.
The rewards you earn for staking typically come in the form of the native token. So, if you stake Ether, you’ll earn Ether. Stake ADA, get paid in ADA. The rewards are distributed automatically, and you can claim them whenever you want.
Unlike mining, staking has a much smaller environmental footprint since it does not require massive amounts of electricity to operate. Most staking can be done right from a laptop. All you need is a reliable internet connection and to select a validator, which is also called a staking provider. They handle the technical aspects so you can just sit back, relax, and collect your rewards.
If earning interest on your crypto for doing almost nothing sounds appealing, staking could be for you. The potential rewards add up over time and require minimal effort.
Yield Farming: Maximizing Returns Through Lending and Liquidity Pools
Yield farming, allows you to put your crypto to work and earn rewards. How? By lending or staking your tokens in DeFi protocols to provide liquidity to the market.
You can lend your tokens to borrowers and earn interest, or add them to liquidity pools to facilitate trading and earn fees. The rewards are usually paid out in the native token of the platform. Some of the popular yield farming platforms are Compound and Aave.
To get started, you deposit tokens into a lending protocol or liquidity pool. Your funds are then put to work, and you earn a percentage of the interest or fees. The rates can be quite high, often 5-50% APY! However, the rewards are not guaranteed and the rates fluctuate based on supply and demand.
The risks can be greater too. A good rule of thumb is to only farm tokens you believe in long term. If volatility worries you, consider ‘stable yield farming’ using stablecoins. The returns are lower but so is the risk.
Liquidity Mining: Providing Liquidity and Earning Fees
Liquidity mining allows you to earn rewards for providing liquidity to a decentralized exchange (DEX). You add funds to liquidity pools that enable trading pairs on the DEX. In exchange, you earn a portion of the trading fees and receive liquidity provider (LP) tokens representing your pool share.
To get started, you deposit an equal value of two cryptocurrencies that you want to provide liquidity for, like ETH and USDC. Your funds are added to the liquidity pool for that trading pair. Whenever someone trades that pair, a small portion of the trade (the fee) is deducted and rewarded to liquidity providers like you. The larger the share of the pool your deposit makes up, the bigger portion of fees you earn.
The main benefits of liquidity mining are the potential to earn high APRs from trading fees and receive LP tokens you can stake to earn additional rewards. It is best to choose stablecoin pairs or assets you believe will maintain a steady ratio to minimize impermanent loss.
Liquid Staking: Staking Without Locking Up Your Assets
Liquid staking allows you to stake your crypto assets without locking them up. Unlike regular staking where your assets are locked up for a fixed period of time, liquid staking lets you stake and earn rewards while still being able to withdraw your funds at any time.
Liquid staking pools your assets together with other stakers and stakes them on your behalf. You receive staking rewards and can withdraw your funds at any time without waiting for a determined period. The liquid staking provider is able to offer this by only staking a portion of the pooled funds at a time. The rest remain liquid so users can withdraw.
In liquid staking, you can stake and unstake at any time without waiting. Also, it is easy to use and requires no technical knowledge to get started.
Things to Consider for Staking Alternatives
- Whether it is yield farming, liquidity mining, or liquid staking – the services are offered by third-party providers. So, you need to research and make sure that the platform you use is reputed and risk-free.
- Smart contract risks and rug pulls are also possible.
- Providers charge fees for managing the process which can reduce your rewards.
- Impermanent loss is a risk with yield farming and liquidity mining. For yield farming, it may eat into your returns in case of a volatile market. And for liquidity mining, since the value of your deposited assets can change relative to each other, reducing your share of the pool.
- Although your funds are liquid, the committed portion is still at risk of slashing if the network is compromised or if the validator misbehaves. This risk is usually low but worth noting.
All these alternatives require handing over control of your assets to a centralized provider which some may see as a downside.
Conclusion
So, there you have it – a brief description of staking, yield farming, liquidity mining, and liquid staking explained. The crypto space moves fast, so keep an eye out for new developments and opportunities. But for now, you’re armed with the knowledge to get started earning passive income on your crypto holdings.
You could just try some simple staking. Or you could provide liquidity to a DEX and earn fees. Or depending on your risk appetite, you may opt for yield farming. The future of finance is decentralized, so take advantage of all these new ways to put your crypto to work.
These fields are evolving, and new methods of earning income through existing assets keep being introduced. Whatever path you choose, good luck and happy earning!