What is Staking and Farming in Crypto?

Staking is a way to earn passive income from cryptocurrencies. It operates on the Proof-of-Stake (PoS) consensus algorithm and its variants, and the yield on some coins exceeds 50% annually. To explore potential opportunities you can:

-          check the current staking yields for various coins via this link

-          get a staking calculator from a prominent crypto wallet and;

-          find staking statistics here.

The essence of staking is locking a certain amount of coins in a wallet to gain the right to participate, either directly or through intermediaries, in maintaining the blockchain's functionality and receiving rewards for doing so. Staking plays a similar role in PoS blockchains as mining does in the Bitcoin network.

Staking is presented as a profitable alternative to simply holding cryptocurrencies in a wallet, serving as an analog to a bank deposit in the crypto industry. The yield from staking varies depending on the blockchain and can reach tens of percentages or more annually.

How is Staking Different from Mining?

Mining is the process that ensures the functionality of blockchains operating on the Proof of Work (PoW) algorithm. Bitcoin, the first cryptocurrency, operates on this algorithm. Miners use computational power to maintain the network and process transactions, for which they receive rewards. If mining can be called a competition of computational power, staking is a competition of coin holders in a particular blockchain. The main difference between staking and mining is that staking does not require significant computational power, the purchase of graphics cards, or application-specific integrated circuit (ASIC) miners. Consequently, staking is a more environmentally friendly and energy-efficient way to create new blocks in a blockchain. Another advantage of staking is that the cryptocurrency owner does not need to have the required technical skills to run and maintain a computational machine.

Mining requires more involvement in the process; one must constantly stay on top of things. In contrast, staking is simplified and open to a larger number of blockchain community members, and the entry barrier for staking is lower than it is for mining.

Types of Staking

In principle, staking resembles a bank deposit – the user transfers funds to an account, leaves them untouched, and earns passive income. The more funds in the account, the higher the profit.

In addition to this basic scheme, individual blockchains may have their own conditions for staking.

1. Fixed Staking (Locked Staking)

This approach requires the user to specify the period they intend to keep their assets deposited in advance. The token owner can choose a convenient term but cannot change it later. For example, if it’s set for three months, the coins cannot be withdrawn earlier.

With this type of staking, users receive a fixed fee. Such contracts usually offer higher interest rates, making this option attractive to those who want to earn more money.

An example is ETH 2.0 staking. To become a validator, one needs to deposit at least 32 ETH. The annual interest rate ranges from 2% to 20%, depending on the total amount of coins locked for staking. This is a case where the entry threshold for staking is significantly higher compared to traditional mining.

2. Flexible Staking

With this type of staking, no end date is specified for holding the coins. The user can stop participating in the validation process whenever they see fit. Interest will accrue until the participant withdraws their tokens or places an order to sell them.

In most cases, rewards start accruing within a day of opening a flexible contract. However, payments are not made daily. The most common option is monthly payouts.

Flexible staking suits those who do not like to lock up their digital funds for long periods and prefer flexible asset management. Coins placed in such a wallet generate passive income and can be withdrawn at any time.

3. DeFi Staking

DeFi stands for Decentralised Finance. These are various services operating on a blockchain which may include lending, insurance, prediction, etc.

DeFi projects are based on smart contracts, which are beneficial because they ensure the automatic execution of transactions under pre-set conditions.

DeFi staking differs from regular staking in that third parties are involved in the process. For example, these could be organisations or individual users who borrow coins from the owner with interest. In other words, they are being lent funds.

The system is designed to accurately and efficiently control transaction execution. However, it is recommended that you always check the efficiency of individual smart contracts. Theoretically, they may contain vulnerabilities.

Facts About Staking:

- Staking is considered an eco-friendly alternative to mining.

- Sometimes, the entry cost for staking can be high. For instance, activating Ethereum validator software requires 32 ETH.

Crypto Farming is a passive way to earn cryptocurrency by providing crypto assets to a liquidity pool. Annual yields can range from 4% to 1000% or more. Annual Percentage Yield (APY) can be checked on the CoinMarketCap platform while statistics on locked assets for various DeFi protocols can be found on DappRadar.

Liquidity pools are used to facilitate decentralised trading and lending in the DeFi space. Users who deposit their assets into a pool are called liquidity providers. In exchange for providing their assets to a DeFi protocol, they receive rewards that can be paid in the provided cryptocurrencies or the platform's tokens.

Facts About Farming:

- Farming emerged in June 2020 when the decentralised finance platform, Compound, started distributing its COMP tokens to users.

- People who engage in farming are called farmers or yield farmers.

What is the Difference Between Staking and Farming?

Staking involves maintaining the blockchain's operation using its native coins. Farming, on the other hand, involves earning fees in the liquidity pool of a decentralised exchange, which is an application built on a blockchain.

What Are the Pitfalls of Staking and Farming?

Staking:

The cryptocurrency market is volatile, as any change in the valuation of crypto assets can harm your share in the platform's protocol. If the price of the crypto asset you staked drops, say by 50% over a year, you will incur a loss. Participants are advised to be cautious when choosing an asset for staking, and it should not be based solely on APY figures, as capital losses may exceed the expected staking rewards.

- Theft of funds from the wallet and;

- System errors.

Farming:

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