Yield Farming vs Staking Crypto: Which Is Better and What Is Yield Farming DeFi?

Today, we’re diving into the two most common passive income options in the crypto space: yield farming and staking. I’ll break down what both terms mean, how you can take advantage of them, and where they differ.

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

Distinguishing between yield farming and staking can be confusing, and I get it. It took me a lot of time to do the research, and I still don’t think there’s a 100% clear definition for each term. Often, they are used interchangeably or with slightly different meanings. But I’ll cover the basics and explain the differences, focusing on the rewards and risks involved.

The end result for both is similar: you lock up your coins and get rewards. However, the purpose is different. With yield farming, the goal is to achieve the highest yield possible. On the other hand, staking is about securing the network. For that service, you get a reward.

On decentralized exchanges like Uniswap or PancakeSwap, you often see both options available. But staking on these platforms doesn’t have anything to do with securing the network. The main difference is this: with yield farming, you earn a new token, whereas, with staking, you receive the same token you put in.

Yield Farming: Earning Through Liquidity

Let’s take a closer look at yield farming. In yield farming, you provide liquidity to a decentralized exchange (DEX). In return, you earn a portion of the fees generated through the platform’s activity. These rewards are typically paid in the exchange’s native token. For instance, on PancakeSwap, the reward is CAKE.

To participate, you add liquidity to a liquidity pool. These pools are also referred to as “farms” because you’re essentially farming yield. When you add liquidity to these pools, you’re helping to power the marketplace, enabling people to lend and borrow money. In return, you earn a share of the fees they pay.

On PancakeSwap, for example, you’ll need to stake two coins at the same time, which is how liquidity pools work. In exchange, you receive a liquidity pool (LP) token. This token allows you to earn rewards from the fees generated by the platform.

Staking: Network Validation and Rewards

Now, let’s shift gears and talk about staking. In staking, you lock up your coins to help secure the blockchain network. This concept mainly applies to blockchains that use proof-of-stake (PoS), where validators approve transactions and create new blocks. The more coins a validator stakes, the more validation power they have, and in exchange, they receive a reward—part of the transaction fees.

What’s commonly known as staking, especially on platforms like Cardano, Polkadot, or Ethereum, is actually delegated staking. Instead of doing the complicated work of setting up a validator, you delegate your coins to a validator pool. In return, you receive a share of the fees that the pool earns from its validation activities.

However, staking on decentralized exchanges like PancakeSwap doesn’t involve this process of network validation. You’re just staking your tokens in exchange for rewards, but the purpose isn’t to secure the network.

Comparing Staking on Decentralized Exchanges

When you stake coins on decentralized exchanges like PancakeSwap, the term “staking” is used loosely. You’re simply putting your coins into a pool, and in return, you receive rewards, typically paid in the same coin you staked. For example, you can stake CAKE and earn additional CAKE tokens.

There’s a distinction between this type of staking and the kind of staking done on a blockchain like Cardano, where you help validate transactions.

High Risk, High Reward: Is Yield Farming Worth It?

Both yield farming and staking on decentralized exchanges can offer incredibly high returns—often in the range of 100%+ annual percentage yields (APY). But with high returns comes high risk. These platforms are new and can be subject to security issues, hacks, or technical flaws. There’s always the risk that the token’s value could plummet because people stop using the platform, or something goes wrong with the code. That’s why you often see such high APY; it’s a way to compensate for the risk.

I’ve personally experienced this with platforms like ApeSwap. I was earning an impressive return at first, but over time, the value decreased significantly. That’s why I always advise only putting in money that you can afford to lose. Even though the rewards can be great, it doesn’t matter if the value of your investment drops by 80-90%.

Safe Staking: A More Stable Option

If you want a safer option, staking on proof-of-stake blockchains like Cardano is a good choice. The returns are much lower compared to decentralized exchanges, usually around 5% APY. However, it’s a much more stable option because you’re participating in a network that has been around for a while and has a solid foundation.

In contrast, decentralized exchanges can offer returns like 145% APY, but the risk is much higher.

Conclusion: Which Option is Right for You?

At the end of the day, you have to decide: do you want to take on high risks for potentially high rewards, or do you prefer a safer, more predictable route? Personally, I use both options. I like to experiment with riskier platforms for the chance of high returns, but I also stake on safer platforms like Cardano to ensure steady, reliable rewards.

While yield farming on decentralized exchanges can bring huge returns, remember that they come with significant risks. It’s essential to evaluate whether you’re comfortable with the potential for losses.

In conclusion, both yield farming and staking have their pros and cons. It’s up to you to decide which suits your risk tolerance and investment goals best.