If you’ve been around the crypto ecosystem enough or spent enough time in crypto Telegram/Discord chats, you’re sure to come across some conversations involving terms like “staking” and “farming”.
More often than not, investors are just referring to generating some yield by holding on to an asset or depositing it into some yield-generating location. The specifics of the yield is generated differentiate staking and farming.
As both staking and farming involve generating a yield on some value, the means by which this happens differ greatly and can be the difference between losing all your money and being exposed to a stable return that lasts. It’s important to know the difference between each, how the yields are generated, and the risks involved.
In this article, we’ll take a look at what staking is, different types of staking, and why someone would want to stake their crypto.
Staking vs Farming: How Yields Are Generated Differently
Staking is when investors hold on to a cryptocurrency and lock it up for a certain period of time in order to receive rewards for doing so. This is usually done through a proof-of-stake (PoS) protocol/blockchain, but can also be performed on a DeFi protocol, and some centralized exchanges also offer staking options. The rewards are usually in the form of a portion of the transaction fees generated on the blockchain, or in the form of newly-issued coins.
Yield farming, on the other hand, is when investors deposit crypto tokens into liquidity pools in order to receive rewards. These rewards are usually in the form of a portion of the transaction fees generated by the pool. This is usually done through a decentralized finance (DeFi) protocol, where users are able to earn a yield on their tokens by providing liquidity.
Note: This comes with risks such as impermanent loss, where your initial value deposited could decrease and you end up with less than you started, regardless of the yield generated.
Types of Staking
There are many staking options available to earn a yield for holding crypto or depositing it into some location for some time. Below are a few different staking options and how the yield is generated:
Blockchain validation staking
This is when investors hold on to a cryptocurrency and lock it up for a certain period of time in order to validate transactions on the blockchain and receive rewards for doing so. This is usually done through a proof-of-stake (PoS) protocol/blockchain. Some examples of PoS blockchains that allow for this are Ethereum, Polygon, Binance Smart Chain, Avalanche, Cardano, and more.
Decentralized protocol staking
Some protocols such as Pancakeswap, allow users to stake CAKE and earn CAKE. With a flexible APY of 2.28% and a locked APR of 48.86%:
It’s always important to take into account the tokenomics of the crypto you are considering to stake with. CAKE for example, has no supply cap and has an emission of 285,199 CAKE per day.
Another option is The Graph — a decentralized protocol for indexing and querying data from blockchains. It makes it possible to query data that is difficult to query directly. The Graph offers a unique staking option, allowing users to delegate their GRT to “subgraphs” and earn GRT rewards.
Liquid staking protocols allow users to earn staking rewards without locking assets or maintaining staking infrastructure. Users can deposit tokens and receive tradable liquid tokens in return.
stETH, for example, operates via DAO-controlled smart contracts and stakes ETH using elected staking providers. This allows a user with a small number of funds to be exposed to Ethereum staking block rewards.
A different type of liquid staking example would be xSUSHI, the token received from staking on SUSHI. As fees are collected from Sushiswap, they are converted to SUSHI and distributed proportionally across holders in the xSUSHI pool. So when you withdraw your xSUSHI back into SUSHI it will be worth more SUSHI than when you put in.
Centralized exchange staking
Centralized exchanges also offer staking options. This is usually done through the exchange, where users can lock up their coins and receive rewards in exchange for doing so. The rewards are usually in the form of a portion of the transaction fees generated on the exchange, or in some cases rehypothecation of assets. These rewards are usually lower than those of PoS or DeFi protocols, however, they are much more accessible and easier to set up.
Locked staking (centralized exchanges)
Locked staking on a centralized exchange always comes with its caveats, such as the exchanges halting withdrawals or even going bankrupt.
That being said, CEXs such as Binance, offer many locked staking options such as staking AVAX, DOT, NEAR, and even ADA.
Staking provides investors with an opportunity to generate a yield on their crypto by locking it up for a certain period of time. By understanding the different types of staking, investors can assess the risks and rewards associated with each type and choose the one that best suits their needs. Staking also allows investors to diversify their portfolios and spread their risk across different types of yield-generating mechanisms.
On the other hand, farming for a yield is when investors deposit crypto tokens into liquidity pools to
The opinions shared within this article are those solely of MELD Ltd. and contributors. Note that the content within should not be considered financial, legal, or tax advice. Neither the author nor MELD Labs PTE Ltd. are financial, legal, or tax advisors. None of this content should be used to make any form of financial, tax, or legal decisions. Do your own research and consult professionals as needed for official policies, restrictions, and requirements in your jurisdiction.
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