Farming And Staking
DEFI INVESTMENTS-FARMING AND STAKING
Both farming and staking are famous passive income strategies for crypto investors.
They have been
known and have become more popular since the invention of defi. We will be looking at both of these
passive income strategies and by the end of this article you will be able to know what they are all about
and which of them works best for you.
This is a method of earning crypto currencies by temporarily lending existing asserts to defi platforms like
a decentralized exchange (e.g. pancake swap, uniswap etc…). In return for temporarily lending your
existing asserts ,you earn the defi’s platform fees from performed transactions as well as special liquidity
tokens as long as the yield farming process is active.
The rewards from the fees are determined by the liquidity poll APY.
APY is an interest rate that changes
along with the pools activity and token value.
The main objective of yield farming is to attract liquidity by rewarding investors who are willing to lend
their asserts .Whenever they lend their assets, the defi platform can redistribute and sell these tokens to
the customers who need their products .
As they redistribute these tokens to their customers transaction
fees are paid when transactions are performed.
A portion/royalty of these fees are given to yield farmers to reward them for lending contribution to the pool. Yield farming services are automated through smart contracts on the defi platform so there is little to no risk of loosing your asserts because no one can steal your crypto by manually transferring your crypto from your wallet to them selves without your consent. Yield farming generates passive income but a major issue within is the concept of Impermanent loss .
Impermanent loss is very similar to opportunity cost. Reason is because there is a spike in volatility of the crypto assert to go up ,the yield farmer would have earned more money if he just held the tokens and sold them separately instead of lending them to the liquidity pool. Same goes for if there is a sharp spike in volatility causing the price to drop significantly. This is the concept of impermanent loss in yield farming
Staking is not only easier than yield farming, it also has lower risks compared to yield farming. staking
involves a mechanism used by proof of stake block chain network to ensure that node validators (miners)
maintain handwork and integrity and not involve in malicious activities.
Stakeholders have a roll in fulfilling networks and helping out other users perform their crypto
transactions a blockchain.
Their asserts are locked on the block chain network and can not be transferred
for as long as the node operator wishes to supports that block chain.
One major risk in staking is speculation .
This is because your tokens are locked up for a period of time depending on the network and can not be transferred, different networks have different timing periods for when the tokens will be locked up, some even take up to a year. During the lockup period, if there is a speculation that there is going to be a significant drop in the price of that token you staked, you won’t be able to swap and transfer your asserts and if the coin does drop, you can experience losses that may not be gotten back and would have been avoided if the token wasn’t staked.
The loss sometimes might be significant that even the APY and APR rewards cant compensate for it.
So the advisable thing to do is invest in networks that don’t have a lockup time frame so you can transfer and swap your tokens at anytime if you feel /speculate that the price of the token will drop.