DeFi features enable users to finally get a piece of the pie in terms of financial services. The entire DeFi movement was built to remove the centralized factors from the system and introducing a more democratic way to provide essential financial services. Consequently, DeFi provides new and exciting ROI opportunities to the masses.
Two features that have shined bright throughout the rise of the DeFi sector are staking and farming. Both of these services appear similar from the service, but when you delve deeper into their purposes and functionalities, it’s easy to see that these platforms have some stark differences that may make one better suited to your investment strategy than the other. Here’s what you need to know when discussing Staking vs Farming.
What is Staking?
Staking is a method of securing a blockchain by locking your cryptocurrency into a network smart contract. Staking is a core feature of PoS (Proof-of-Stake) networks. These systems eliminate the use of miners and instead, it replaces these nodes with normal users. The advantages of PoS systems are many. For one, they are more scalable and far more energy efficient when compared to PoW networks like Bitcoin.
Notably, the longer you stake and the higher the rewards. Also, the more coins you stake and the more rewards you earn. Staking is used as a way to provide access to community governance systems in some networks. The more tokens you stake and the more weight your vote holds.
Downsides of Staking
There are some downsides to staking. For one, your funds are locked away in the smart contract. You can’t remove these funds or access them without incurring some sort of fee. In some staking pools, if you remove your funds, you lose your rewards completely. In other networks, you simply pay a fee and receive reduced rewards.
Since your funds are locked up, you may find that you are unable to take advantage of better opportunities if they arise during your staking period. Additionally, if the market takes a strong downturn, you can take double losses as the value of the token will drop and you will need to accept early withdrawal fees to even trade these funds in the first place.
Staking lockup periods can vary depending on the network. Some network’s have lockup periods as long as 90 days. Additionally, you will need to provide a certain amount of coins to be eligible for staking rewards. Some networks require you to become a validator node to stake as well.
For example, to become a validator and stake on ETH2.0, you need to stake 32 ETH. For most people, this isn’t a possibility. As such, the emergence of staking pools has simplified this process and allowed users to pool their tokens to meet the requirements. In the end, all those in the pool share in the rewards. This process can require a variety of requirements be met including certain uptime, value, and more.
What is Farming?
Yield Farming refers to the act of providing liquidity to smart contract in exchange for rewards. You receive LP tokens for your participation. These tokens are designed to rise in value as the liquidity pool increases in value. As such, they provide another layer of profit to liquidity providers on top of their rewards.
Yield farming doesn’t serve any role in securing a network like staking. Instead, it’s primarily designed to provide ROIs to investors. It was built out of a desire to improve on the staking mechanisms with more flexibility and options.
Unlike staking, farming doesn’t have preset lock-up periods. The APY rate is constantly hanging with farming pools. This changing rate makes farming a little more complicated than staking in terms of securing consistent ROIs. Expert farmers continually monitor the pools to find the highest yield options with the lowest gas fees.
Downside of Farming
Since farming doesn’t require you to commit to long-term lockup periods, the APY is usually much less than long staking periods. Whereas a staker simply locks their funds up and returns to withdraw their rewards, a farmer must stay on top of the market to ensure that their pool is profitable. Consequently, farming provides less consistent ROIs when compared to staking but far more freedom.
How to Decide Between Staking and Farming
It’s not an easy decision to decide which of these DeFi features is the right move for you. For many, staking is the simpler option because they lack the time to commit to monitoring the yield farming pools. Additionally, the introduction of staking pools makes it easier for users to share in securing larger and more powerful networks,
Try Them Both
It’s recommended that new users give both options a try. Staking is the best for new users because there are very few technical requirements. Platforms such as META 1 provide simple and secure staking options. Once you have a grasp on the staking process, try your luck yield farming. Yield Farming will provide you more ROI opportunities but they require more work on your part. Keenly, you will slowly master both of these features and be able to profit from either function when you see the opportunity.