Over the last five years cryptocurrencies have exploded at an unprecedented rate, but so have the different methods of making income in the cryptocurrency world. No longer do investors have to simply rely on trading to make a profit from crypto.

Now, crypto enthusiasts can contribute to blockchains through PoS (Proof of Stake), provide liquidity to pools, and extract the best possible yields through farming. The possibilities are almost endless and ever-expanding for investors wanting both passive and active income-generating activities.

With such great returns available to be made in the cryptocurrency world, analyzing the opportunity cost of each option is the best way to find a route that suits you.

Let's discuss the differences between Yield Farming, Staking and Liquidity Mining.

What Is Yield Farming?

Yield farming is the act of generating rewards such as interest and cryptocurrency by staking assets on dApps through a DeFi platform. The cryptocurrency is locked up for a certain period of time and acts as liquidity for lending, borrowing and trading.

Automatic Market Makers (AMMs)

A key concept for yield farming is AMMs, which liquidity pools are essential for, where many yield farmers staked cryptocurrency is stored. Automatic market makers allow automatic and permissionless trading for their users, instead of traditional buyers and sellers systems, used in centralized exchanges.

What Is Liquidity Mining?

Liquidity mining is a form of yield farming and another DeFi lending protocol, where users will stake their cryptocurrency into a pool to be used by other users. Liquidity mining rewards are focused on receiving coins from the platform they are ‘lending’ on, hedging their bets that their value will increase in the future.

Like any liquidity pool, providers are rewarded based on the amount of the liquidity pool they provided for.

What Is Staking?

Although staking, yield farming and liquidity mining can often be used interchangeably, there are some key differences. Staking is often seen as the simplest of the three and the most accessible to the average crypto enthusiast.

Staking is the act of locking up your cryptocurrency for a defined or undefined period of time to obtain rewards, usually interest.

Most staking protocols come with specific lock-up rules to ensure liquidity is confirmed for a certain period of time. Staking is the backbone of the PoS (Proof of Stake) model, allowing individual investors to contribute to the blockchain with their cryptocurrency by staking it through validators.

Validators ensure each transaction is secure without a regular third party, like a bank. Unlike the Proof of Work model, which is used in bitcoin, PoS is a lot less resource-intensive and efficient.

What’s the Difference Between Yield Farming, Staking, and Liquidity Mining?

Staking

Maybe the biggest difference between Staking, yield farming and mining is where you can provide liquidity. Staking, as it’s used as the core validating method for many cryptocurrencies is available almost everywhere.

Big, centralized exchanges or CEXs, such as Binance allow their users to simply provide the crypto required for the stake, and they will configure the rest. This allows for hands-off staking and extremely ‘passive’ income.

Also, staking has a lower barrier to entry, many users can stake as little as one USD to start earning rewards.

Safety: Well over $100 billion in crypto assets are currently being staked, as they are the backbone of many cryptocurrencies, unlike yield farming and liquidity mining which operate on more niche or less used platforms. With this massive participation comes safety.

You are much less likely to lose money staking, although it is possible.Rewards can be completely passiveComplex strategies are not required

Yield Farming

Yield farming when done properly is a lot more hands-on than traditional staking. Investors' crypto is still being ‘staked’ but can only be done on DeFi platforms, such as Pancake swap or Uni swap.

Yield farming operates on smaller blockchains to help provide liquidity, creating much more risk potential.

With this extra effort comes an extra reward. Yield farmers can receive a cut in transaction fees and token rewards on top of their usual interest, making the potential APY a lot more lucrative.

However, for yield farmers to truly maximize their earnings, in the spirit of a yield farmer, they can change pools as often as weekly and are constantly readjusting their strategies to maximize earnings.

As you can see, yield farming has a higher barrier to entry than staking and liquidity mining, especially when participating in pools run on chains with high fees, such as ERC-20.

Liquidity Mining

Liquidity mining directly helps keep blockchain technology decentralized. The main difference is the rewards received. Liquidity miners will often receive the native token of the blockchain as a reward and have a chance to earn governance tokens, giving them a vote on any new legislature, empowering each individual.

The Risks Involved with DeFi

As traditional staking can be completed on centralized exchanges, like staking your CRO on crypto.com they are less vulnerable to the downsides of DeFi. However, staking is the basis of yield farming and liquidity mining, so the risks listed below are able to occur on any DeFi protocol. Staking is also mainly done on DeFi protocols, only recently becoming more mainstream with big exchanges offering the option. Here are the biggest risks you should be aware of as a potential user:

Exit Scams: Providing liquidity on new blockchains means exit scams such as rug pulls are more common and harder to foresee. Smart Contract Exploits: Bugs in smart contracts can be abused to take funds from liquidity providers.Information asymmetry: There is no centralized body regulating information that most investors are used to. Although DeFi creates a trustless and permisionless space for investors, great information asymmetry can promote distrust in users while combining with the anonymity of crypto creates a marketplace rife with scams.Impermanent Loss: Can happen when the liquidity you provided is worthless at the time of withdrawal than when you put it in the pool. Liquidity is often locked for a set period of time, anything can happen in the crypto market during that time.

Are there Any Risks in Staking?