In short, Liquidity Providing is all about storing your coins in liquidity pools. Users receive remuneration for their participation in liquidity pools in the form of native tokens. Yield Farming is very similar: users also receive rewards for participation in the liquidity pools. However, they lock in their cryptocurrency assets in blockchain protocols and do not obtain native Liquidity Provider Tokens.
Yield Farming Vs Liquidity Mining
16 Dec, 2022
Over the last decade, cryptocurrencies evolved from an almost esoteric and incomprehensible innovation to one of the most promising financial sectors. With the DeFi space growing at a tremendous rate, there is a small wonder that we see more and more new methods that allow using cryptocurrency in smart and profitable ways. Just a couple of years ago the entire crypto sphere was limited to trading and trading only. As of today, cryptocurrency enthusiasts become directly involved in the internal functions of blockchain networks. Those who regularly visit modern instant exchange platforms, such as Exolix, will surely notice the abundance of new features, the most notable of which are mining, farming, and staking. All these options have a common feature: users have to pledge their assets in support of decentralized applications. However, there are also many differences between providing liquidity to pools, accumulating yields through farming, or relying on the Proof-of-Stake protocol for extra benefit. Analyzing these crucial differences will allow you to receive great returns most suitably. Hence, let us look closer at Yield Farming, Liquidity Mining, and Staking.
Staking is often considered the simplest approach of the three, so it is only natural to start with it. Staking is about locking up your cryptocurrency for a certain time to receive rewards. While your coins remain locked you are unable to convert them. However, it does not mean that they are passively waiting for an occasion: without them, the Proof-of-Stake consensus mechanism would be useless and the entire blockchain network would effectively crumble. When we talk about the risks that wait for those users who decide to stake their crypto assets, it should be noted that Staking is considered safer than other strategies. Those risks include the following:
- Validator risk;
- Conterparty risks;
- Inconveniently long lock-ups;
- Liquidity risks.
So, what does Yield Farming mean? Essentially, this is a modified version of traditional staking. The crypto assets remain staked exclusively on decentralized platforms. A smart-contract-based liquidity pool allows users to access cryptocurrency assets, which have not been available to them before. Hence, these users obtain a chance to borrow these assets, using them for highly lucrative margin trading. Those users who provide these cryptocurrency assets for the common liquidity pool receive rewards in the form of passive income. Of course, this type of operation would be impossible without innovative software, such as the so-called Automated Market Makers (AMMs). Risks associated with Yield Farming include the following ones:
- Impermanent loss;
- Liquidation risks;
- Diverse hazards associated with smart contracts.
Although Yield Farming is quite risky, it can work miracles when done properly. In addition, it is a life-saving mechanism in the case of coins with exceptionally low operating volume. Under normal conditions, these tokens have almost no chance to prosper. However, thanks to Yield Farming, they may accumulate enough active coins to increase the pool of clients until the blockchain network would become sustainable.
Liquidity Mining is quite similar to Yield Farming. Many users state that there is no dilemma between Yield Farming vs Liquidity Providing: both methods rely heavily on gathering liquidity for the blockchain. However, as a reward for staking your cryptocurrency assets users obtain native tokens: Liquidity Provider Tokens. The amount of these tokens is determined by the total amount of accumulated liquidity in the pool. Users may use these tokens for governance or convert them for other cryptocurrencies at diverse third-party exchange platforms, such as Exolix. As for diverse risks, that one may expect when mining liquidity, the most notable of them are the following:
- Impermanet loss;
- Smart contract risks;
- The so-called “rug-pull” projects.
What is the difference between yield farming and liquidity mining?
Although all three approaches have some notable similarities, the differences between them are crucial. If we look at the mechanism at the core of each approach, we will discover that these differences directly determine their purposes. Yield Farming is a highly beneficial approach, which makes it possible to invest your cryptocurrency assets in liquidity pools or protocols, obtaining proportional profit. Staking also deals with locking in your coins in protocols in return for privileges. However, the main goal of staking is to validate transactions and maintain the network, instead of gathering additional liquidity for the blockchain system. Liquidity Mining, while also bringing you rewards for locking your cryptocurrency assets provides you with governance privileges. What about the Difference Yield Farming and Liquidity Mining are capable of showing when we consider them in terms of profitability? If profitability is your main concern, then you should probably take a closer look at Yield Farming. This approach is currently considered the highest-grossing of the three with a caveat that it is also significantly riskier than traditional Staking.
All three strategies are essential for the further evolution and efficiency of the DeFi space. What is even more important in the eyes of ordinary users is that all these approaches are highly beneficial. As for the direct Yield Farming vs Liquidity Pool vs Staking comparison, we can see that all these approaches at certain levels begin resembling each other up to the point of functional and structural interchangeability. Liquidity Mining may be considered a component of Yield Farming, which, in turn, should be viewed as a part of traditional Staking. These strategies also provide a wide range of opportunities for investors. Risk-seeking investors can make a good profit with Yield Farming. On the other hand, those who are interested in minimizing risks may find their niche with Staking. Whichever opportunity attracts you most, a profound understanding of these mechanisms will become your reliable guiding light.
Frequently Asked Questions
Although still risky, Staking can become a highly lucrative investment strategy, which may bring you even a 10-20% profit per year. Furthermore, the chosen blockchain network will greatly benefit from additional holders necessary to provide effective services, keep transactions secure, and work towards further decentralization.
Usually, Yield Farming involves higher degrees of risk because of market volatility. Therefore, Staking is considered a safer option almost universally.
Unfortunately, this option is open only for those blockchain networks, which rely on the Proof-of-Stake consensus mechanism. However, don’t let this minuscule detail become an obstacle on your path to advanced DeFi opportunities. At Exolix you may instantly and limitlessly swap your crypto assets, obtaining those coins that can be staked and earning additional income.