Staking & Yield Farming Which is a better investment strategy in Cryptocurrency?
When it comes to cryptocurrency related investment, staking and yield farming are two most commonly discussed venues as passive earning strategies. Often times they are even viewed by people with little understanding of market to be one and same. While they may sound identical, they are two clearly different strategies with different outcomes.
What is Staking?
Staking is an investment method where you use your token holdings to help the network by validating transactions in proof of stake based blockchain ecosystem while earning rewards at the same time. This method you an assured return guarantee but relative growth of your assets is very little in real time.
As the primary function of staking is to ensure that blockchain network stays secure, the rewards are proportional to validation performed. One needs a higher stake to see higher returns but when gains are viewed in percentage, it will seem too low.
To explain in simple terms, staking is similar to how normal deposit works in bank, you invest funds in savings account for which certain amount of interest is paid by the bank and there is high guarantee for safety of your funds. The risk that comes along in staking strategies aside from lower returns is higher lock-in time frame for your tokens.
What is Yield Farming?
Yield farming is method of investing your cryptocurrencies to grow your total assets by leveraging on DeFi/CeFi protocols which involve high risk factors. Most often, the user’s tokens are used in lending and locked in various liquidity pools for which they gain interest on capital. But, the investment is not just limited to lending protocol and can also make use of wide range of other DeFi services such as trade, borrow etc which require the use of tokens.
The purpose of investor who prefers this strategy always involves seeking higher returns. They are more open to risky options but expect fast growth potential for their investments. This works similar to handing your funds to investor who makes use of funds to credit loans, invest in other projects and provide you with interest on your capital proportional to profits made from the venture.
This is a high-risk environment as you give control of your tokens to projects you choose to invest in. If the project turned out to suffer an impact from sudden market fluctuations or turns out to be one of those rug-pull start-ups who disappears a few days after collecting tokens from investors, there is a chance for total loss of funds. There are other risks involved such as bugs in smart contracts vulnerable to exploitation and draining of liquidity pools and such resulting in equal possibility for loss or gains.
Who does it suit better?
Staking suits an investor better when idle tokens are used for investment. Or a user can choose to invest in staking projects which have less lock-in time frame and the associated APY sits well within the comfortable zone. Another alternative would be to invest during prolonged bear market runs.
Yield farming is more suited to investors who know and understand how the markets play out. Users who can see certain pattern in market activity and better read and understand smart contracts. It requires an investor to do heavy research into their investments before making deposit, a clear understanding of the market and also be open to prospects of losing assets while also having the patience to tolerate market swings.
A lack of understanding of market performance and tendency to follow the crowd would often result in investments seeing higher loss than gain when it comes to yield generation practices.
Here at Kana Labs we provide you with both staking and yield generation options. You can check out the same from our platform. While staking is currently live, we are currently working to provide our users with certain level of capital preservation measures for their yield generation investments and hence the same is still under testing and development. You can see yield generation come live in our platform later this year.