What is the difference between yield farming and staking in digital currencies?

Today, many specialized terms are used in financial markets and digital currencies, one of the most important of which is the difference between yield farming and staking. Yield Farming or profit cultivation and staking (Staking) which means holding cryptocurrency are two important terms about making money from digital currencies that you must be familiar with their differences. Over time, the developers of the blockchain network have found new ways to earn cryptocurrencies, which has made it easier for users to earn money from digital currencies.

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for example; Extraction and mining is the oldest way to earn cryptocurrency, and after that, the staking method, then the yield farming method was presented. These two methods are sometimes used interchangeably, but they also have differences, which we will discuss below about the difference between yield farming and staking.

These two terms are so similar that sometimes it can be a bit difficult to distinguish between them. Therefore, the difference between yield farming and staking is an important issue that you must be familiar with.

If you are not familiar with the concept of mining, read the proposed article on coin mining and mining.

Before comparing yield farming and staking, it is better to know that both terms refer to a matter where the user invests his assets and capital to support the blockchain, currency exchange in decentralized exchanges or any other operation involving capital. needs, offers.

What is staking?

As we mentioned, after extraction and mining, the method of earning money that was provided was staking. One of the most important terms in the world of digital currencies today is staking. Staking in digital currencies means keeping and holding your assets in a digital wallet to ensure the security and performance of the blockchain network. By doing staking, you confirm your transaction and support the blockchain network, for which you will also receive a reward.

Staking expresses a financial interest in the continued success of a protocol supported by users and traders. Also, staking shows the good faith of the participants’ actions. As mentioned in the previous articles, the Bitcoin network operates with the Proof of Work (PoW) model, which is based on energy. Proof of work means that users earn money by mining cryptocurrency.

High consumption of electricity and energy, harmful effects on the environment, and heavy cost in the purchase and purchase of mining devices are among the problems of the proof of work method, which has faced many criticisms. Staking was presented to solve the mentioned problems, which is a suitable alternative to the proof-of-work method. In the staking method, users save their desired cryptocurrency.

This ensures that users have no incentive to sabotage the network, as they will lose their deposits. For example, in the Ethereum 2 network, each node must store at least 32 Ethereum (ETH), which is called Ethereum staking.

These nodes receive a reward for depositing cryptocurrency. The purpose of this work is to secure the blockchain network.

What is a sticker?

A person who deposits his cryptocurrency to become a network node is called a Staker. Each sticker will receive a reward for confirming transactions and generating new blocks within the network. But staking is not only provided for this activity model; Many different centralized or decentralized wallets and exchanges may offer you terms.

For example, users deposit their cryptocurrencies such as Bitcoin, Akita, or any other digital currency in them, and in return, the users of that network will receive staking interest. With this method, the user no longer needs to be involved in setting up nodes and complying with the desired network protocols.

These wallets or exchanges act as an intermediary to give you staking interest in exchange for depositing your cryptocurrency. This method is similar to depositing assets in banks and private organizations. By keeping your money in the bank, you withdraw a monthly amount as interest.

The more the number of stickers in a network, the more decentralized that network will be; And the more decentralized the network is, the harder it will be to damage that network. Therefore, the staking method is necessary for any blockchain network.

What is yield farming?

Now that you are familiar with the staking method, to know the difference between yield farming and staking, it is better to familiarize yourself with the concept of yield farming. Yield farming is a method in which a user lends his cryptocurrency to a Defi project. In this case, according to the area in which it operates, the DiFi project uses this cryptocurrency to provide its financial products.

Suppose the DeFi project is a decentralized exchange, in this case the project uses this digital asset to create a platform for trading digital assets. Traders will pay a fee for each transaction, and a portion of these fees will be awarded to the yieldfarmers of that pool.

A very important point in the field of yield farming is that its profit is variable. The reward of users depends on the amount of use of this project by other users, so its profit is also variable. For example, suppose the use of a decentralized exchange increases for any reason and $10 billion is traded daily in a particular cryptocurrency.

An amount of these transactions will be charged as a fee, and a part of these fees will be given to Yieldfarmers. Keep in mind that the next day, the amount of transactions will reach 1 billion; In this case, the reward of yieldfarmers changes, and as a result, it is not possible to determine the amount of profit through the yieldfarming method.

The difference between yield farming and staking

Up to this section, we tried to introduce you to the concept of yield farming and staking. Stay with us now to better understand the difference between yield farming and staking.

Asset locking

As we explained in both methods, you deposit your asset which is locked. In the staking method, you cannot withdraw your assets whenever you want, but in the yield farming method, there is no such restriction and you can leave the network whenever you need your assets. Not having a time limit is one of the most important differences between yield farming and staking.

Variable rewards

The reward for the transactions made in the yield farming method is not fixed and you may suffer a lot of losses when the market goes up or down due to the decrease in the confidence of traders. While there are very few changes in the staking method.

annual profit

The amount of annual profit makes it easier for you to distinguish between yield farming and staking. In yield farming, the annual profit of users is much higher than the annual profit of staking. In yield farming, the annual profit may be more than 100%, while in the staking method, the rewards are at best 20%.

Risk taking power

As mentioned, yield farming is a profitable method, but you should keep in mind that this method requires high risk tolerance. Any mistake in this method may destroy your entire capital. Also, there are many hacks in the DeFi protocol every year. The staking method also requires risk taking power, but in this method the risk is much lower.

last word

If you are interested in the passive strategy in the world of digital currency, the difference between yield farming and staking is one of the most important topics in this area, and in this article we compared these two methods. Staking means holding assets, in this way users deposit their assets in a platform that ultimately increases the security of the blockchain network.

Yield farming means profit cultivation, in which users lend their assets to secure the liquidity of DeFi protocols. Both methods are new and practical, and to decide between them, first check the difference between yield farming and staking.