We told you several times that there are different ways of making money in the crypto world. And a couple of times we mentioned crypto staking and liquidity pools as well. We showed you how staking works on the Binance.
Today, we will review those 2 tools again to give you a better understanding of each of those tools.
Crypto Staking and Liquidity Pools
Crypto Staking involves providing your cryptocurrency assets as collateral to blockchain networks that use the Proof of Stake (PoS) consensus algorithm. In return, PoS allows stakers to receive rewards.
Staking is considered a profitable alternative to simply holding cryptocurrencies in a wallet, akin to a crypto-industry equivalent of a bank deposit.
However, there are downsides to staking:
- Low APY (Annual Percentage Yield) rates.
- Time constraints.
- The price of a particular asset can experience significant drops.
Liquidity Pools (LP) in DeFi, are tokens locked in smart contracts that facilitate efficient trading of assets and enable investors to earn income from holding cryptocurrencies. The process of earning income this way is referred to as “Farming.”
Decentralized exchanges (DEXs) are a primary product of the DeFi market. When a crypto investor provides liquidity to a DEX, such as Uniswap, they receive a portion of the platform’s fee revenue, paid by token swappers accessing liquidity.
For these actions, users receive rewards in the native tokens of a specific decentralized exchange, which they can then sell or use for further farming.
The yield from farming is higher, but the risks are also greater:
- Security is the primary risk. If you provide liquidity to a DeFi platform, and the project loses funds, those funds may not be recoverable.
- The issue of impermanent loss. When the price of one of the assets in a liquidity pair experiences significant growth, you will ultimately earn less than if you had simply held that asset in your wallet. Similarly, you will incur impermanent losses if the asset loses its value.
Staking and cryptocurrency farming represent two completely different worlds with different goals and objectives. While farming aims to maximize potential returns, staking focuses on helping blockchain networks stay secure in exchange for rewards.
Both of these earning methods are available on both centralized and decentralized exchanges.
