DeFi basics - Yield Farming and Staking

Mar 29, 2023·

5 min read

Web3 decentralized finance (DeFi), Here is a simplified DeFi basic on Staking and Yield Farming :

The movement of DeFi has been leaving a growth track in the vast space of innovations in the Blockchain world. The permissionless, decentralization system has been helping people worldwide. With the help of an internet connection and a verified supported wallet, you can easily transact and interact with DeFi. It's set to be trustless and independent, and it requires no middleman or intermediary.

Emerging financial technology is built as an independent body. It removes intermediaries between financial transactions, and this decentralized finance has opened up a wide range and multiple of income for investors. Among the new concepts and leading ideas that have been adopted are yield farming and staking.

Earning rewards through cryptocurrency holdings is possible on Defi using permissionless liquidity protocols. Anyone can build a passive income in the blockchain by leveraging the use of the decentralized ecosystem built in Ethereum. HOLDing in cryptocurrency, which is how you look forward to future rewards, can be enhanced with Yield Farming.

Do you want to Yield Farm?

Yield Farming can be such if you invest in DeFi, where you lend your coins in cryptocurrency or tokens to get your reward or interest in the form of transaction fees. Similar to traditional banking, which is a centralized system, whether you lend or borrow, one of the parties involved pays interest, and the other gets the interest as a reward for investment. So does it work here, you're technically lending money to the bank.

You maximize your investment return through DeFi when using yield farming on a DeFi platform and get your reward in the form of their services. You simply provide liquidity to various token pairs and earn rewards in cryptocurrencies.

Yield farmers who want to increase their yield output can employ more complex tactics. For example, yield farmers can constantly shift their cryptos between multiple loan platforms to optimize their gains. Decentralized exchanges (DEXs) are commonly used by yield farmers to lend, borrow, or stake coins to earn interest and also as an opportunity for them to speculate on price swings.

Users who contribute their cryptocurrencies to the DeFi platform's operation are referred to as liquidity providers, shortened as (LPs). These providers contribute coins or tokens to a liquidity pool, which is most of the time a smart contract-based decentralized application (dApp) containing all of the funds. When providers place tokens in a liquidity fund, they are paid a fee or interest generated by the underground DeFi platform on which the liquidity pool is running. Smart contracts are used for lending, with no middleman or intermediary.

The liquidity pool drives the marketplace system, where anyone can lend or borrow coins or tokens. Users are charged fees for using these marketplaces, which are used to compensate liquidity providers for yield-farming their tokens in the pool.

Do you want to stake?

DeFi staking might be so similar to its yield farming, but it entails putting one's crypto tokens into a smart contract to earn more tokens in return. So here you put to in expectation, but in yield farming, you lend to get returns. Consider it a decentralization equivalent to making a bank-fixed deposit. DeFi staking has emerged as an additional way to profit from your crypto assets since the advent of crypto and Decentralized Finance.

Securing crypto assets into smart contracts in exchange for becoming a validator for the DeFi protocol or a Layer 1 blockchain is the DeFi staking process. The staking token is typically the blockchain protocol's native asset.

When users lock or stake their crypto assets in a DeFi system, they essentially become validators for the network. Every proof-of-stake blockchain protocol relies on cryptography to ensure its security.

Without a doubt, DeFi staking provides a straight, simple, and forward approach to anyone looking to enter the world of crypto assets while also avoiding the high costs associated with trading capital. To participate in DeFi Staking, you do not need to handle private keys, execute deals, acquire resources of the platform, or perform any other onerous duties because there are several. Staking tokens will help you generate passive revenue from your digital assets as a user. If you stake DeFi tokens, the potential interest rates will be significantly higher, and they will be protected by a highly secure smart contract.

Should you stake or yield farm?

Staking cryptos requires you to be on DeFi platforms rather than dealing with a traditional system of banks or a government. These platforms hope to facilitate financial transactions for both business bodies and individuals by utilizing smart contracts.

Each DeFi is based on a specific blockchain network and adheres to a specific standard. These two factors have an impact on its durability and DApp development capabilities. However, not every platform or DeFi system is suitable for staking.

Check the coin liquidity before investing so that you will be able to forecast your returns in no time. Also, calculate if the reward or return is worth it and make sure you don't invest in only one so that you will settle for the best later.

It is always difficult to compare two investment strategies. Investors are always looking to get their money's worth when it comes to the yield farming or staking concept. Of course, this means something different to everyone. One investor may prefer staking, while another may not, depending on the expected time frame.

Profitability, on the other hand, is a different story. If investors get involved early, both yield farming and staking strategies can produce impressive results. However, early involvement or investment does not guarantee that the project is going to be successful.

Conclusion

Both staking and yield farming have advantages and disadvantages. Yield farming might sometimes be risky, but it provides quick, reliable returns. Staking, on the other hand, is much better suited to novices or total beginners in the world of crypto investment. It is simple to learn both, and it does not require a large initial investment.