Crypto Staking vs. Yield Farming: What’s the Difference?

Diversification of assets and earning potential yields are common reasons why crypto users pursue staking or yield farming. However, it’s good to know that these two strategies are entirely different in many ways. They cater to different investors and may also vary in flexibility, complexity, and profit percentages.

What Is Staking?

Staking is the process of holding crypto assets for a specific timeframe to support the operation of a blockchain and earn rewards, usually through annual percentage yields (APY).

Many cryptocurrencies that offer staking use the consensus mechanism “Proof of Stake” (PoS), validating and securing transactions without involving a bank or payment processor. Staked cryptocurrencies become a part of that process. Blockchains randomly select “validators,” those who confirm transactions and validate blockchain data. And usually, the greater the amount staked, the bigger the chance a user has to become a validator and earn more rewards.

Rewards will vary depending on the platform and cryptocurrency you use for staking. For instance, Kasta, a crypto payment app, offers up to 8% APY to users who lock up $KASTA tokens in the app for six months other benefits, such as lower exchange fees.

What Is Yield Farming?

Yield farming is an umbrella term for the process of lending your crypto assets to a decentralized finance (DeFi) platform to earn rewards or passive income in the form of interest or yields. It was compared to farming as it allows you to innovatively "grow" your cryptocurrencies.

Also called liquidity farming, yield farming takes place using smart contracts, which are transaction protocols or computer programs that execute and automate the financial agreement between a buyer and a seller. Yield farmers may also lend or borrow crypto assets from yield farming pools for potential generous gains.

The Differences Between Staking and Yield Farming

Some users, whether new or tenured in the crypto market, think staking and yield farming are the same. But despite the similarities of their nature, these concepts are different in specific ways, such as the following:

1. Complexity levels

Staking and yield farming are not the same in complexity. Staking is a much simpler concept for earning passive income as you have to decide which cryptocurrency to use, lock your assets in a staking pool for a specific timeframe, and get your yields once that period is over. On the other hand, with yield farming, users need to identify which crypto and platform to use for better interest rates. They may also constantly switch platforms or tokens (despite requiring more gas fees and going back and forth) to get the highest possible returns.

The process of yield farming is more complicated than staking but it also provides more opportunities for higher returns. However, the former requires more time for learning, research, and good management skills to earn profit.

2. Deposit duration

Flexibility is another difference between staking and yield farming. Staking usually offers better APYs when users lock their assets for a prolonged period, which means they wouldn’t be able to withdraw their assets for a few months to several, depending on the lock-up period required.

Meanwhile, yield farming doesn’t require users to lock assets. Yield farmers can freely provide liquidity and withdraw assets from any liquidity pool and transfer them to another any time they’re not satisfied with their returns.

3. Transaction costs

Yield farmers may have to deal with more gas fees if they constantly switch from one liquidity pool to another although higher returns could suffice for such fees. Those who stake crypto don’t switch pools since their assets are locked up so they don’t have to pay gas fees. In fact, they earn some network fee percentage when they validate transactions.

4. Risk levels

There’s always some level of risk involved in cryptocurrency as you can lose a huge amount of money whenever a cryptocurrency rapidly drops in value. This also applies to staking and yield farming. However, yield farming can be riskier than staking because you can practice this strategy even on newly launched DeFi projects, which are more prone to rug pulls—not to mention transaction fees can also add up to the potential loss.

While a lot of new DeFi projects are noble and genuine, some developers intentionally drain assets from liquidity pools for personal gain. A survey conducted in 2020 also found that 40% of yield farmers still need to learn how to read smart contracts, which can also have bugs or weaknesses that can increase the risk of losing assets.

Users can stake assets with minimal investment, making it a less risky option for those new to DeFi. In addition, rug pulls are less likely to happen on established PoS networks.

5. Profitability

Staking on exchanges and some platforms tend to offer fixed APYs, typically ranging from 5% to 14%, depending on how long you lock up your assets. This allows users to predict or calculate returns easily. Returns in yield farming may fluctuate and range from 1% to 1,000 APY% based on a few market metrics, such as arbitrage options, overall volatility, and the liquidity pool you enter.

6. Token requirements

Staking requires only one type of cryptocurrency from investors. This means you’ll provide liquidity or lock up assets in a staking pool and earn yields using just one type of coin or token (e.g., ETH).

Yield farming, on the other hand, requires a pair of tokens (e.g., BTC-ETH or USDT-USDC) when depositing into a liquidity pool. You can provide a custom ratio of the asset pair (e.g., 30% BTC and 70% ETH) when entering customizable tools, while you need to provide a pair of tokens of equal value (e.g., 50% USDT and 50% USDC) when entering an equilibrium pool.

7. Impermanent loss

In yield farming, there’s a so-called impermanent loss which is when the price of the assets you provided in a liquidity pool deviates from the time they were deposited. Cryptocurrency prices adjust in liquidity pools during volatile circumstances, and when a user withdraws their assets when the crypto price changes, the impermanent loss becomes an actual or permanent loss.

Staking is not subject to impermanent loss, although users may lose staked assets due to a crypto winter or bear market.

8. Security

In staking, users participate in a blockchain’s strict consensus methods, and any attempt to jeopardize the system could lead to the perpetrator losing their staked assets. It’s generally more secure than yield farming, considering that yield farming on newer DeFi products could be more vulnerable to hackers, especially if glitches or bugs exist in their smart contracts.

Final Thoughts

Despite the differences between staking and yield farming, they still share a few common characteristics, such as options to earn passive income and allowing users to beat value depreciation in legacy markets caused by inflation.

Staking is a better option for crypto investors with lower risk appetite and/or those who want to earn passive income the easiest way possible without needing to research or learn the intricacies of the crypto market. On the flip side, yield farming is more suitable for users with higher risk tolerance and at the same time, has enough liquidity or capital, considering that this strategy requires more initial investment than staking.