Farming and Staking are unconventional ways in the decentralized finance (DeFi) industry where one can earn interest on their idle digital assets.
In this farming vs staking guide, we explain how each DeFi investment product works so that you can make an informed and correct decision with your investment.
What is Farming?
Farming is a service offered by decentralized (DEX) and centralized (CEX) exchanges. You can lend your digital coins/tokens to DEX or CEX so that it can offer buyers and sellers sufficient levels of liquidity of specific trading pair.
For instance, Pancake Swap (DEX) offers the trading pair BNB/Brise. In order to swap BNB for Brise and vice versa, there needs to be an adequate amount of liquidity available to cover the trades.
What is yield on farming?
To earn a yield on your tokens, you need to deposit the same amount in BNB and Brise. For instance, $1,000 worth of both BNB and Brise at current exchange rates.
As long as your BNB and Brise tokens are contributing to the BNB/Brise liquidity pool on your chosen DEX, you will earn a percentage of trading fees. These are the fees that buyers and sellers pay to access the respective trading pair on a DEX.
As a result, yield farming offers a great way to offer passive income on your idle tokens.
What is Staking?
Unlike farming, in staking you are required to lend only one token to the respective exchange. Staking involves locking your tokens for a designated time frame on DEX or CEX to receive the passive income. For instance, if you stake Brise on a DeFi Swap DEX, you will earn an APY(Annual Percentage Yield) in x % depending on whether you opt for specific tenure.
Farming vs Staking – Key Differences
|You won’t need to agree to a minimum lock-up period when you engage with a yield farming pool. This means that you can withdraw your tokens at any time.||Staking often requires you to lock your tokens for a minimum period of time. With that said, some DeFi exchanges offer flexible staking terms.|
|Yield farming is volatile – so you never quite know what yield you will make.||Staking typically comes with a fixed APY. This means that you always know exactly how much you will get back once the staking term concludes.|
|Yield farming will often generate a higher yield in comparison to staking. But, the risks with yield farming are typically higher too.||Staking generates lesser yield. But, the risk is comparatively low compare to yield farming.|
What is Impairment Risk?
A risk specific to yield farming is that of impairment loss.
Impairment loss basically means that you could have earned more money by leaving your tokens in a private wallet instead of depositing them into a liquidity pool.
- For example, let’s say that you provide liquidity for the pair Sphynx/Brise.
- You decide to provide the equivalent of $1,000 in both Sphynx and Brise, so your total investment is $2,000.
- Suppose that over the course of three months, you generate an APY of 40% (for a year) by farming Sphynx/Brise.
- On a three-month term, this means that your tokens grew by 10% (three months).
- However, if you could have made 20% during the same period by leaving your Sphynx and Brise in a private wallet, you have suffered from impairment loss.
After all, the process was somewhat counter-productive, as you would have generated a great APY had you avoided the yield farming pool.
APR vs APY
Find the key difference between APR and APY in below table
|APR is an abbreviation for annual percentage rate.||APY stands for annual percentage yield.|
|Which means yearly funds that you get as investment interest. This usually includes any additional costs or fees you have to pay along the way but does not incorporate compounding.||Which is the actual rate of return earned on an investment, considering the compound interest.|
|APR is a simple interest rate, so your profit depends directly on the original investment.||Compound interest, in contrast to the simple one, allows investors to get interest on interest, adding their profit to the initial sum of investment|
|For example, if you invest 1,000 coins with a 10% yearly interest rate, you’ll get 1,100 coins by the end of the first year, 1,200 coins by the end of the second year, and 1,500 by the end of the fifth one.||For example, if you invest the 1,000 coins with 10% compound interest rate. With daily compounding, you’ll get 1,105 by the end of the first year, 1,221 by the end of the second year, and 1,648 by the end of the fifth one.|
Following DEX in Bitgert Chain provide platform for Farming and Staking
Sphynx is an all-in-one solution for trading, farming, staking, holding, and so much more. This includes a single platform with a consolidated wallet that’ll always have a bird’s eye view of your assets, dynamic charts, farms, and staking portals, meaning you’d never have to leave Sphynx.
IcecreamSwap helps you swap your tokens on Bitgert just like from Uniswap or Pancakeswap. Use your tokens to provide liquidity and earn yields. The Swap is decentralized, trustless and uses the Uniswap V2 Smart Contracts, which are battle-tested to provide you max security.
Brisepad is designed to help fuel the future of mass-market blockchain applications building on the Bitgert chain. It aims to be the largest decentralized launchpad on Bitgert Chain, attracting solid projects and helping them raise enough liquidity for their project development.