Staking vs. Yield Farming vs. Liquidity Mining: What Is Best for You in 2024?

The world of decentralized finance (DeFi) has introduced various ways to earn yield on your idle tokens. These include staking, liquidity mining, and yield farming. However, crypto users are often confused about which method suits them best.

In this article, we will explain each term and lay out the major capabilities and differences of yield farming vs. liquidity mining vs. staking with real-life examples to show you how they work.

Staking: How It Works, Pros and Cons, and Real-Life Example

The crypto deposit acts as collateral to ensure that the validator behaves honestly. In return for their time and effort, validators are rewarded with newly minted cryptocurrencies.

As running a validator node can be complicated – requiring technical knowledge and 24/7 runtime – most crypto holders simply choose to delegate their tokens to a validator.

This way the delegator can earn a part of the staking rewards without having to spend time and money running a validator node. Note that validators usually charge a commission and the pooled staking reward is shared among all delegators on a pro-rata basis.

Pros & Cons of Staking

Example of Staking

Here we will not talk about staking by running your own validator node, instead we will give an example of how crypto staking can be done in the most simple and easy way.

The most convenient way to stake PoS cryptocurrencies like Ether (ETH) and Solana (SOL) is via a method known as liquid staking.

Let’s say that you want to stake ETH. You can stake it via liquid staking platforms such as Rocket Pool or Lido.

These platforms are known as liquid staking platforms, as they return stakers with an equal amount of liquid staking tokens (LST) for every token they deposit.

The LSTs mirror the market value of the underlying staked token, and are free to be used for trading, staking and more. Note the liquid staking platform charge fees for their services.

Liquidity Mining: How It Works, Pros and Cons, and Real-Life Example

Liquidity mining was born with the advent of decentralized exchanges (DEX). Traditional markets that deal in equities, forex, and commodities rely on centralized market makers (commonly brokerage or trading firms) to provide liquidity and facilitate trade. DEXes, on the other hand, rely on liquidity pools and smart contracts to facilitate trades in a decentralized manner.

Crypto holders are typically required to deposit tokens in pairs to participate in DeFi liquidity mining. For example, in order to supply tokens to the ETH-USDC pool on a DEX, you will have to supply equal dollar amounts of ETH and USDC tokens to the pool.

In return, liquidity providers receive a portion of the trading fees earned by the pool. Liquidity providers may also receive additional rewards such as governance tokens depending on the DEX.

Typically, the return on supplying exotic cryptocurrency pairs is much higher than that received for supplying stable and popular crypto pairs like stablecoins, ETH, and BTC.

Pros & Cons of Liquidity Mining

Example of Liquidity Mining

Let’s explore Polygon-based DEX QuickSwap in our liquidity mining example.

Once you connect your crypto wallet to QuickSwap DEX, you will find the option to supply liquidity to a pool. For the MATIC-SFL token pair (shown above), you will need to supply equal dollar amounts of both tokens.

The DEX interface will also show your contribution percentage to the pool, determining the share of trading fees you earn. You will receive LP tokens in return, which act as receipt tokens when you supply liquidity.

If you are an advanced user, you also have the option to choose the price range in which you want to provide liquidity for. This way, you can supply tokens for the price range at which you expect the most volume, thereby earning you more fees.

Single token liquidity supply is also available on most DEXes.

Yield Farming: How It Works, Pros and Cons, and Real-Life Example

It is often practiced as a multi-step process where a crypto investor aims to make the maximum returns out of their crypto tokens. The innovations in liquid staking, restaking, and crypto lending have made yield farming a complex process.

Yield farming became popular during the DeFi Summer of 2020 when lending protocols like Compound and DEXs like Uniswap introduced innovative products such as liquidity pools and incentive programs.

Pros & Cons of Yield Farming

Example of DeFi Yield Farming Strategies

Here, we talk about how crypto investors use DeFi yield farming strategies to maximize their yield.

DeFi yield farming strategies must be planned with broader market risks and protocol-specific lockup periods and staking conditions in mind.

Staking vs. Yield Farming vs. Liquidity Mining: Head-to-Head Comparision

We’ve compiled the major differences between staking vs. yield farming vs. liquidity mining.

How to Choose Which Is Right for You?

If you are new to crypto, it is important that you first learn how to use self-custodial wallets and understand the basics of blockchain, such as gas fees and native tokens.

Once you have mastered the basics, you can try your hand at staking. Staking has become an easy and straightforward process with the emergence of liquid staking platforms such as Lido and Rocket Pool. You will not only earn yield on your idle tokens but you will also be contributing to the crypto-economic security of the crypto network.

Since staking is exclusive to native tokens, you can try liquidity mining to earn yield on non-native tokens. However, you must learn about the risks, such as impermanent loss involved before you dive in. Hence, liquidity mining is advised for experienced DeFi users.

Yield farming strategies can be incredibly complex and need to be planned well. Only advanced DeFi users should deploy yield farming strategies.

The Bottom Line

Staking, liquidity mining, and yield farming have made it easier than ever to earn yield on your assets. The permissionless nature of DeFi makes these interest-yielding innovations even more special. Anyone in the world with an internet connection and crypto tokens can try one or all of these yield-generating methods.

While choosing staking vs. yield farming vs. liquidity mining, it is important to remember that they come with investment risks. Always do your own research before engaging in these activities.

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