21 July 2022
2 min read
What does being wealthy mean? It means building your assets and making your money work for your goals. In other words, having a sizable net worth. But how does one build wealth?
Although active investment can give you huge benefits, it also comes with risks and requires much more time and understanding. Since it’s not always a good idea to be a risky active investor, it is generally advisable to opt for ways/strategies to generate passive income efficiently.
To help you understand which strategy would suit you the best, we have drawn differences between two major passive investment strategies coming to light in the Crypto world right now: Yield Farming vs Staking.
What is Yield Farming?
Yield farming is a form of investment that allows users to lend their cryptocurrency assets in a permissionless way to DeFi platforms. Since, in this case, you are lending money to the bank, this is comparable to receiving interest from a bank account. Contrary to depositing money in a bank, only yield farming may be riskier, more variable, and more complicated.
What is Staking?
Staking allows you to stake a portion of your holdings and earn rewards. How does that work? Your cryptocurrency generates dividends while being staked because the blockchain uses it. Staking-enabled cryptocurrencies use a "consensus technique" called Proof of Stake to guarantee that all transactions are secure and confirmed without the involvement of a bank or payment processor. If you decide to stake your cryptocurrency, it joins that operation.
Key Differences between Yield Farming and Staking
Being a nascent, average investor, the terms yield farming and staking can leave you perplexed. Often used interchangeably, these strategies have distinct meanings and features that can be tedious to understand.
Keep reading to know the major differences between Yield Farming and Staking, and find out which suits the best for you.
1. Mechanism Staking uses a Proof-of-Stake(POS) consensus mechanism. Unlike Proof-of-work, there are no miners involved in this consensus mechanism. But with Yield Farming, users can use dApps to stake their assets in a lending protocol.
2. Incentives Users receive staking benefits every time a block is validated, thanks to the distribution of incentives on-chain, which creates new tokens of that currency. On the other hand, investors who opt for yield farming earn their incentives in the form of APY (Annual Percentage Yield)
3. Security In particular, if there are bugs in smart contracts coding, yield farming based on more recent DeFi protocols may be more susceptible to hackers. Because stakers are a part of the blockchain's stringent consensus process, staking is considered more secure. Any system-trickery effort could cause the perpetrators to lose their staked money in an instant.
Yield Farming and Staking, both have their perks and disadvantages. To put a pin on the best strategy to generate passive income would be unfair because it depends on more than one aspect. If you’re an average investor, try learning more about all the strategies.
Research is a tool which comes in handy when you’re beginning your journey as an investor. Remember that information is your only best friend. We hope this article helped you gain some insights into the two most famous investing techniques in Crypto.