Yield farming and staking may seem similar but they are different. They are alike because people need to lock up their tokens to earn rewards, but different because of their elements. Below are the major differences between liquidity mining and staking.
Staking is easier to do compared to yield farming. The former is a seamless way of earning passive income, as all the user needs to do is add their tokens to a stake pool run by a node or validator. Delegators or token holders are rewarded for binding their tokens to the network during staking.
On the other hand, yield farming is more complex, as the user has to consider the risks, look for strategies to earn income and do much more. It may not be easy for the average crypto enthusiast.
Yield farming is riskier than staking, as yield farmers have to think about security risks, potential rug pulls, and so on. If hackers find a loophole in the smart contract of the liquidity pool, they can drain the funds, making farmers lose their holdings in the pools.
This has happened on multiple occasions. There is the risk of rug pull. If a pool is floated by a fraudulent development team, they can disappear with the funds, leaving investors in the lurch.
Staking comes with its risks, though they are not as many as the aforementioned. If a delegator stakes their token with a Validator that is penalized, it could lead to the slashing of their tokens.
Yield farming can offer higher APY compared to staking. It can range from 1% to 1000% returns depending on the project. Usually, new projects offer higher APY for those that inject liquidity in their pools.
Yield farming is necessary for decentralized exchanges and decentralized lending platforms while staking is important to protect a PoS network.
Both are a good way of earning a passive income. However, we feel it depends on one’s experience and risk taking ability to decide which one would be the best for them.