Farming has developed a lot with DeFi (Decentralized Finance) and it is difficult to navigate with the three-digit returns of farming compared to staking.
By performing staking, you participate in the security of the network and validate transactions. We are then rewarded in cryptocurrencies with a return of 5 to 15% depending on the blockchain . In addition, staking often involves blocking funds over a period of a few days to several months.
Staking can be done on an exchange like Binance or directly through a cryptocurrency wallet like a ledger . It is not necessarily necessary to have a node on a server to have rewards from your wallet thanks to the delegated-proof-of-stake .
You can compare rewards and perform simulations at https://www.stakingrewards.com/
Staking returns are not stable, they vary slightly over time, but this gives you good visibility over a year for example.
Farming consists of providing liquidity for decentralized exchange platforms such as Uniswap or Serum . The user interacts with a Smart Contract to deposit crypto-currencies in exchange for tokens which will allow him to withdraw his crypto-currencies from the Smart Contract.
There is therefore a greater risk that a flaw will be exploited in a Smart Contract than on the Proof of Stake mining protocol of a blockchain.
The user who deposits cash will not be eligible for airdrops on the blockchain, as they only own an exchange token.
The yield of liquidity pools is often very high, in particular thanks to Auto-compounding . This is an algorithm that automatically reinjects rewards into the selected farming pool.
The Beefy platform allows farming on many blockchains and integrates auto-compounding. Returns sometimes approach 1% per day if the cryptocurrencies concerned have little liquidity. The rewards come from transaction fees and from using decentralized exchanges that use these pools of liquidity.
It is possible to “farm” a single asset or in pairs. Be careful to choose two correlated assets, because if returns are often higher with a USDC pair, it is because you are more at risk of intermittent losses.
Imagine that you deposit 1 ETH and 4000 USDC in a pool with a return of 20% and the ETH outperforms the dollar and its price reaches $4400, then if you want to withdraw your funds you will not have 1.01 ETH and $4400, but maybe 0.97 ETH and $5000.
Therefore, if you had kept 1 ETH in staking you would then have more than having “farmed” in this liquidity pool. It is essential to master the notion of impermanent loss before embarking on farming.https://www.youtube.com/embed/Nr9UH3k5jxs?feature=oembed
It is preferable to use blockchains with low transaction costs, because transactions are regularly “farmed”.
You can add even more risk with “leverage” on certain platforms such as Tulip Garden . If the price of the two crypto-currencies of your pair remain correlated you can make a lot of profit in the short/medium term, but also lose everything if one of the two crypto-currencies increases a lot compared to the other because you will no longer be able to repay your leverage.
Staking is interesting when you think the cryptocurrency is in an uptrend or that there are going to be airdrops, it allows you to accumulate without taking any risk. Blocking funds is still a disadvantage in the event of a sudden market movement compared to farming. This is a long term strategy.
Farming requires more expertise to find a good strategy that will be effective in the medium/short term, we advise you to follow the youtuber BitBoy Crypto to understand the possible strategies.
There is a strong demand for farming optimization algorithms such as Yearn Finance . You have to be careful to control your risk when choosing the Smart Contract platform and crypto-currencies and not be blinded by four-digit returns.
Do not hesitate to share this article and tell us in the comments if you are more into staking, farming or both?