Yield Farming vs Staking: Which One Should You Choose?

Regarding earning rewards in DeFi, the two standout strategies are yield farming and staking. But which one should you put your hard-earned tokens into? 

Both methods can help your crypto holdings work for you, but they operate in different ways and come with varying levels of complexity, risk, and reward. We’ll break both concepts down into their simplest forms so you can make an informed decision and, ideally, grow that portfolio like a pro. 

The battle for profits is about to go down…but for beginners! Yield farming vs staking. What’s right for you? By the end of this post, you’ll know for sure. Let’s get after it.

What Is Staking? 

Staking is like the “set it and forget it” crockpot of crypto investments. It’s a straightforward process that lets you earn rewards by locking up your cryptocurrency to support the operations of a blockchain network.

It’s mostly used in Proof of Stake (PoS) blockchains, where your staked tokens help secure transactions and keep the network running like a well-oiled machine. 

Think of it this way: By staking your tokens, you’re stepping into the role of an honorary blockchain validator. You’re contributing to network security while earning a slice of the pie. The best part? Staking can be done on centralized platforms and in decentralized finance. You don’t have to choose.

Pros and Cons 

The Good: 

• Passive Income: Earn rewards with minimal effort. Once staked, you just sit back and watch it grow.
• Network Security: By staking, you’re helping make the blockchain more resilient. Nice job!
• Low Maintenance: No need to constantly monitor or rebalance.

The Not-So-Good: 

• Lock-Up Periods: Your crypto might be stuck for weeks, months, or longer. Say goodbye to liquidity.
• Lower Returns: Staking is like a dependable 9-to-5 income — not flashy, but stable. Frying-pan-to-fire types might prefer yield farming.
• Tanking Prices: Sure, 20% is a great APR for a volatile token. But if the underlying asset dives 30% overnight, you may have been better off in something a bit less risky. Even in crypto, there’s no such thing as a free lunch.

What Is Yield Farming? 

Now, yield farming is the ambitious overachiever in the DeFi world. It’s a strategy that involves providing liquidity to DeFi protocols in exchange for rewards. Think of it like renting out your crypto, except instead of collecting rent checks, you’re getting rewarded in tokens, sometimes at dizzying rates. 

Yield farming requires you to place your assets in a liquidity pool (a fancy name for a pot of money used for trading on decentralized exchanges). 

You get a reward based on your contribution to the pot. If the fees for the day are $100k and you make up 1% of the pool, then you get $1k in fees. Everyone is equal in the yield farming world.

Pros and Cons 

The Good: 

• Higher Rewards: Potentially massive returns. Did someone say “APY in the triple digits”?
• Flexibility: Jump in and out of pools with relative ease.
• Options: You can do a lot here. It’s almost like gamified finance. Users can farm with regular tokens, meme coins, LRTs and LSTs, and do all kinds of things with rewards — from dumping for stables to participating in protocol governance.

The Not-So-Good: 

• Complexity: While it’s not that hard, beginners need to do quite a bit of research before diving in. Yield farming comes with a steeper learning curve.
• Impermanent Loss: This happens when the prices in the two tokens of a pool shift dramatically in opposite directions. Most smart contracts will increase APY/APR when this happens to minimize IL, but it’s not a perfect system. The TLDR? If the token prices fluctuate too much, you could earn way less than expected.
• Active Management: Expect to babysit your funds, rebalancing and optimizing frequently. Back then, yield farming was a passive strategy, making the yield farming vs staking debate a bit harder. But now, concentrated liquidity rules DeFi, and users must check their positions often.
• DeFi Exclusivity: If you’re a crypto user who shies away from decentralized finance, you won’t be able to participate. DeFi is the only home for farming.

Key Differences Between Yield Farming and Staking 

Now, onto the main event: staking vs farming. But before we get into the nitty-gritty, here’s a quick snapshot for your mental notes (or actual notes, because why not?): 

Feature	Staking	Yield Farming
Returns	Consistent but moderate	Higher but fluctuates in value
Effort	Low (passive)	High (active)
Liquidity	Often locked, with the notable exceptions of LRTs and LSTs	More flexible
Risk	Relatively low	Medium, but high if managed poorly (impermanent loss, etc.)
Cost	Minimal	Higher due to frequent transactions

Risk vs Reward — Which Offers Better Returns? 

Yield farming vs staking. What’s going to pay out the most? That’s a valid question and one we here often.

Farming typically comes with higher rewards, but those rewards also carry significantly higher risks. Whether it’s price volatility or impermanent loss, yield farming requires users to play the risk-reward balancing act. 

Staking, on the other hand, offers predictable, stable returns. Where yield farming feels like playing blackjack in Vegas, staking feels like investing in a high-yield savings account. 

Active vs Passive Approach 

Are you the “set it and forget it” type? Go with staking. It doesn’t demand your constant attention. 

Yield farming, however, involves some heavy lifting (more clicking, which means more transaction fees, which can add up over time, especially if you’re on a pricey blockchain), as you’re always on the lookout for the next best pool and keeping an eye on market conditions. 

Access to Funds 

Staking can have lock-up periods that could frustrate anyone needing quick access to their liquidity. 

Most DeFi players use liquid staking and liquid restaking tokens at this point. For example, Lido, which operates wstETH, is a liquid staking token. Users can swap ETH for wstETH, which is, in essence, a receipt token. It says you staked with Lido. While the amount of wstETH never changes, the value will, as the rewards are compounded back into your position. The biggest benefit…it doesn’t create a taxable event.

Liquid restaking tokens go a step further. The user can stake the receipt tokens, or LSTs, and receive a different receipt token. It’s staking on top of staking. More rewards. Still not a taxable event. But…more smart contract risk, and honestly, it also creates more centralization.

Yield farming, on the other hand, is generally more flexible, though transaction fees and withdrawal penalties can still pinch. Every time you claim rewards, you’ll have to pay fees. However, many users have found workarounds.

Some let rewards accrue until they have a set goal. That could be a dollar goal, such as $20 or $50. Some prefer to hold the tokens until there is some price appreciation. And then some protocols offer liquid versions of locked tokens, so users can get staking rewards from a locked position without locking anything themselves.

However, these liquid tokens often struggle to maintain their peg, as they’re heavily dumped.

Yield Farming vs Staking — Security Considerations for Both 

Smart contract vulnerabilities and rug pulls are risks in yield farming. If you were an unlucky users who added funds to a meme coin/stablecoin pool and then that meme coin rugged, we have two words for you.

1. Hawk
2. Tuah

And also…sorry. That sucks. 

But it’s part of the world we live and invest in. And it’s an important part of the yield farming vs staking debate.

You can mitigate some of this risk by farming with bluechip tokens and stables. Most DEXs have a USDT/USDC pool or something equivalent. BTC/ETH pools are also found on all major platforms. But given the the difference in price action of late, that pool will have quite a bit of impermanent loss. So something like BNB/ETH or SOL/ETH may be better.

Staking isn’t entirely risk-free either. Staking pools and platforms can face their fair share of hiccups. Does anyone remember Celsius? Yeah, that guy’s going to jail. Events like that are becoming increasingly rare, but it’s something to keep in mind.

That being said, staking is generally considered safer. Kraken is likely not going anywhere. Neither is Coinbase. At least not anytime soon. 

Transaction Costs 

Yield farming’s frequent transactions lead to higher gas fees compared to staking, which you set up once and watch from afar. If gas fees make your wallet cry, staking might be a friendlier option. 

Which Is More Stable? 

Um. None of the above is the honest answer here.

Staking metrics are generally a bit more predictable, making it a safer play in uncertain markets. Yield farming, with its fluctuating APYs and market-driven structures, thrives when markets are bullish but can falter when things turn bearish. 

But keep in mind crypto runs 24/7. If something crazy happens in Japan while you sleep, your whole port could be in rough shape when you wake up.

Tax Regulation for Both Methods 

Whether staking or yield farming, rewards often count as taxable income (aside from the few cases we mentioned). 

Yep, Uncle Sam (or your country’s taxman) wants to know what you’ve been earning. Be prepared to keep detailed records of your transactions. Many accountants still struggle to properly understand and record profits and losses in this space. You may need to seek out someone who specializes in crypto tax filing.

Yield Farming vs Staking: How Are They Similar 

Despite their differences, they’re both ways to earn with your crypto. Both require participation in DeFi protocols (although staking does have limited functionality on some centralized exchanges) and a crypto wallet, making them accessible once you get the hang of how they work.

For the most part, they are two sides of the same coin. But they operate differently, earn differently, have their own sets of risks.

Which Strategy Is Right for You? 

We’ve probably cleared up what most of you came here to learn and settle your internal staking vs farming debate. Which is awesome. That’s what we were hoping for. But for those of you who need a bit more information, here are a few more things to keep in mind:

What’s the Better Choice for Beginners 

Staking is hands-down the winner here. It’s straightforward, carries less risk, and provides a hassle-free way to dip your toe into the crypto earnings pool. 

Better Choice for Those Who Are More Experienced in Managing Risks 

Ah, yield farming. If you know your way around DeFi ecosystems and have the time to actively monitor your funds, this could offer dazzling rewards that make it worth the effort. 

Diversity Is Usually the Best Choice 

This is our favorite. Crypto is about choices. Instead of thinking about this as yield farming vs staking, why not think about it as yield farming and staking?

Why not have the best of both worlds? This is crypto. These are your funds. Do whatever you want. That’s why it’s booming. That’s why it’s great.

By diversifying, you can leverage the stability of staking while chasing the higher returns of yield farming. Balance is key. 

How to Get Started With Staking and Yield Farming 

1. Choose Your Platform: Research trusted platforms for staking or farming. Kraken is the one we recommend for centralized exchanges. For DeFi, it’s a mixed bag. It depends more on the individual exchanges you want to use, how trustworthy they are, the tokens you want to farm with, etc. There are too many options to list here.
2. Set Up a Wallet: If you haven’t already, create a crypto wallet for storing your tokens.
3. Research, Research, Research: Whether it’s pool fees or lock-up terms, know what you’re getting into. Every chain has memes at this point. Every chain has access to LSTs, LRTs, and blue chips. Diversification is important here. Crypto is not the place to put all of your eggs into one basket. Also, when it comes to DeFi yield farming vs. staking, some projects may be better at one than the other.
4. Start Small: Experiment with a small amount of crypto before committing heavily to either strategy.

Learn How You Can Make More Money With Crypto Using Dypto Crypto 

Crypto farming vs staking? DeFi yield farming vs staking? Dypto vs Crypto?

All strategies in this space offer exciting opportunities, but knowledge is power in the crypto world. That’s why we’re here.

We can help refine your strategy even more. At Dypto Crypto, we break down complex ideas (such as staking vs yield farming) into simple, actionable strategies that help you maximize returns while keeping risk in check. 

Sign up today (it’s free!) and start turning your crypto into a wealth-generating machine.