In my previous articles, I wrote extensively about Yield farming to help you understand the process by which you too could target high yield generation to benefit your portfolio. Given the current bear market, it is all the more important that such strategies are available to you.
These strategies shall help you generate the additional return to average down on your holdings or cover your losses, as the case may be. However, there is another strategy that you could employ and achieve the same result, and it is called Staking.
This article is focused solely on this and whether Staking or Yield Farming is the better route.
1. What Is Yield Farming?
Yield farming is a collection of strategies used in decentralized finance (DeFi) that create more cryptocurrency from your existing holdings.
They primarily return maximization strategies that aim to enhance yield. Primarily, yield farming involves lending, borrowing, or providing liquidity to a pool.
2. What Is Staking?
Before we understand staking, it is important to understand Proof of Work.
2.1. What is Proof of Work?
Bitcoin works on an authentication concept called Proof of Work. In layman’s terms, every time a transaction is recorded on the Bitcoin blockchain, it is verified by a miner who solves a complex mathematical equation to earn the right to verify.
The right is valuable as it allows the miner to earn a mining reward in the form of $BTC. The underlying idea is that miners will be incentivized to verify the correct block of transactions and the decentralized nature of the chain will ensure that if any miner slips up, the other miners will ensure he doesn’t succeed.
2.2. What is Proof of Stake?
Proof of Work was deemed environmentally unsustainable due to the large amount of power consumption that is required to run the ASIC machines.
To overcome this, the blockchain industry came up with a new verification procedure called Proof of Stake. Instead of having high computing power to solve complex mathematical equations, Proof of Stake requires a transaction validator to show that he has a stake.
The idea is that if I have a stake in the system, I will act in the best interest of the system. Hence, the algorithm ensures that the validators with the highest stakes are awarded the right to verify the next block of transactions. In return, they earn cryptocurrency for running the validating node.
This validator shall then advertise his node and ask other holders to delegate their stake to him. In return, he promises to share a portion of the staking reward with those who have interested him with the stake.
3. Where To Stake?
While the node itself is run on a software patch that connects your computer with the blockchain, as retail investors, this would indeed be too technical for you. Hence, the Crypto industry came up with the idea of Staking Pools.
- Choosing the staking pool
- Entering the amount
- Hitting the Stake Now button
4. Benefits & Risks of Staking
Staking allows you to put your idle cryptocurrency to work and earn more of the same.
This is a great form of passive income which you can sell immediately for stable coins or keep to average down your holding. Let’s take a look at an example.
As you can infer, staking rewards will help you lower your cost, increase your coin holdings and help you get out of your losses faster.
The risk with staking is that staking rewards increase supply and a higher circulating supply generally means that the price of the coin, all else equal, should fall.
While this is true for an isolated view of markets, in reality, market forces may move the price higher or lower. In any case, because you are locked into the staking program, you will not be able to trade your staked assets.
Hence, staking is generally a great strategy in bear markets, as it allows you to accumulate and increase your position size with a view to selling at higher prices when markets turn bull again. Being locked at prices targeting ATHs is generally considered idiocy at best.
5. Conclusion: Staking or Yield Farming? Which One Is Better?
Due to the simplicity of opting into a staking program through centralized exchanges and the automated nature of reward distribution, staking is the best strategy for the average investor.
However, staking is far less profitable a strategy than yield farming and is only recommended to supplement your investing during a bear market. On the other hand, yield farming could potentially have high returns both in bull and bear markets as the power of leverage is utilized.
That being said, yield farming requires a command of the protocol itself and a measure of active trading.
This might not be the forte of every average individual.