The crypto in your wallet does not serve any purpose when left alone. In the world of decentralized finance (DeFi), there are many ways for investors to earn money using their crypto assets through passive income.

Staking and Yielding are two popular strategies through which users can participate to earn passive rewards. While they both offer passive user income without having to do active trading, they differ in mechanics, risk, and reward potential.

What is Staking?

Staking is the process of locking up a part of your crypto assets for a specified period of time to support the operations of a blockchain’s network operations using a proof-of-stake consensus mechanism. For their participation, they are rewarded with new coins or tokens depending on the amount of crypto you stake.

How it Works:

• You lock your crypto using a smart contract on the proof-of-stake network
• By staking, you become a participant in the network’s consensus mechanism. Validators are required to confirm new transactions or create new blocks.
• The network randomly selects a validator to add to the next block on the chain. The probability of being selected increases depending on the amount of crypto you have staked.
• When the validator successfully adds new blocks, they are rewarded with new cryptocurrency or the same cryptocurrency that was staked.
• The staked assets act as collateral. If the validators try to manipulate the blockchain, their entire portion of the staked crypto can be “slashed” as a penalty.

Characteristics of Staking:

• Rewards are given in the native token of the blockchain 
• Staking usually provides more profitable and stable returns.
• The process is simple and low-risk
• Users will need to lock their assets for a certain period of time
• The risk of losing staked assets may arise from network failures 

Popular staking coins include Ethereum (ETH), Cardano (ADA), Solana (SOL), and Polkadot (DOT).

What is Yield Farming?

Yield farming is another method to earn passive income through your digital currency assets. Yield farming, often referred to as liquidity mining, is a process of adding coins to a liquidity pool, and in return, the users (Liquidity providers receive yield in the form of trading fees, governance tokens, and interest.

How it works:

• A user (Yield farmer) deposits their crypto asset into a liquidity pool on a decentralized (DeFi) platform.
• In return for being a liquidity provider, they are rewarded with tokens, which represent their share of the pool 
• The user earns rewards from several sources, like trading fees, interest, and new tokens.
• Liquidity providers receive their rewards on time. As the whole process is managed by smart contracts, it does not require a central authority.

Characteristics of Yield Farming:

• Liquidity can vary depending on market conditions, which may affect the easy withdrawal of funds.
• Yield farming is a high-risk, high-reward strategy that offers higher returns compared to traditional investments.
• Rewards may fluctuate based on market conditions and token demand
• Requires users to constantly monitor investments to maximize profits.
• Participants must manage impermanent losses that may arise 

Popular Yield farming Platforms: Binance, AAVE, Uniswap, PancakeSwap, Polygon, and OKX.

Which Strategy offers Better Returns?

To understand which strategy is best suited for generating passive income, we must first know your risk tolerance, time commitment, and investment goals. Not everyone is suited for yield farming, and some users may not be satisfied with Staking either.

• Staking is ideal for users who prefer stability and a predictable income with low risk and minimal involvement.
• Yield farming is best suited for investors who are willing to manage risks and constantly monitor their positions for potential gains.

For long-term portfolio growth, a balanced approach of allocating part of your assets to staking and another part to yield farming can offer a mix of safety and profitability.

Final Thoughts

Staking and yield farming both play an important role in the DeFi ecosystem. They provide diverse opportunities for investors to earn passive income through the assets they already own.

If you are a beginner, try participating in staking. It will give you an idea about the ecosystem. Once you get comfortable with Staking, explore yield farming to take your profits to the next level.

To maximize your crypto portfolio, it is important to understand how each strategy aligns with your financial objectives and risk profile. Whether you prioritize safety or fast growth, DeFi offers flexible opportunities for everyone.

FAQs

It offers flexibility and accessibility. Unlike staking, yield farming generally does not require long lock-up periods. Users can enter and exit the pool at any time, giving them more flexibility in managing their funds and adjusting to market conditions.

Staking can be a good strategy for users who prefer long-term investments.

Lending and borrowing, platforms like AAVE allow users to lend their assets for interest or borrow against them as collateral.

Tron: APY 20%, Ethereum: APY 10%-15%, Avalanche: APY 8%-10%

No. Staking is a long-term investment, and the profit you make through trading is very high compared to returns earned from staking. It just depends on how good you are at trading