Staking vs. Yield Farming vs. Lending: What’s the Best DeFi Has to Offer?

Trading tokens looking to buy low and sell high isn’t the only way to put your crypto capital to work. The DeFi market is buzzing with opportunities to earn income in various ways, ranging from staking tokens to earning interest on lending platforms. 

Read this guide to learn about popular strategies. These include staking, yield farming, and lending. This will help you make better choices for your crypto yield-generating path.

What Is DeFi Staking? 

The idea of DeFi staking is very simple. You deposit or “lock up” your crypto in a smart contract. Then, you start earning rewards for your commitment. 

There are different types of staking, so you can pick what suits your needs best.  

PoS staking: If you’re holding coins of a Proof-of-Stake blockchain, you can lock them up and help secure the network and validate transactions in exchange for rewards in native tokens. To make it even simpler, you can go for liquid staking and stake your coins through protocols with the use of liquid staking tokens (LSTs).

These are issued by the protocol to represent your staked position and the accruing rewards in the underlying network. What’s good about it is that it makes your capital more liquid, and you can also use the LSTs in other DeFi protocols to potentially earn additional yield.      

Governance staking: Here, you can be a decision maker. The governance tokens you own let you vote on proposals. These proposals can include upgrades, how to use the treasury, and more. 

The main rule here is simple: the more you stake, the more powerful you become, while the yield also increases accordingly. It is generated through the protocol’s revenue, new tokens, and treasury rewards.    

Pros & Cons of Staking

DeFi staking can be complex because it has many forms. You should think about its benefits and downsides before using your tokens. 

Pros

• You control your coins

• You help decentralize and secure the protocol

• You can get a voice in protocol governance

• You get extra ways to generate yield via LSTs

Cons

• Potential smart contract and protocol vulnerabilities

• Possible lock-up periods

What Is Yield Farming?

Somewhat, a bit more complicated than staking, yield farming is about helping decentralized trading protocols improve their liquidity. All you need is to deposit two (or sometimes more) different tokens into a liquidity pool to earn rewards. 

By locking up your tokens in this kind of pool, you help traders to swap their coins instantly. In return, you earn a share of the trading fees and additional rewards in the protocol's native token or other farm tokens.

Yields – commonly measured as APR (Annual Percentage Rate) or APY (Annual Percentage Yield) – vary and are calculated algorithmically based on pool liquidity, trading volume, and token emission rates. Keep in mind that the rates you see before locking up your coins are often just estimates based on recent performance. So, as real farmers in the real field, you actually never know what yield this type of farming might bring. 

What’s more, remember that yield farming comes with the risk of impermanent loss, which occurs when token prices diverge from their deposit ratio. This makes your liquidity pool share value less than if you had simply held the tokens separately. Naturally, the loss becomes permanent only once you withdraw your coins.

Pros & Cons of Yield Farming

Pros

• You can earn some of the highest advertised yields in DeFi

• You get tokens from trading fees and specific protocols you're interested in

Cons

• Rates might be more volatile than in staking

• Risk of impermanent loss

What Is DeFi Lending? 

Traditional lending gets a new twist in the DeFi world. Now, you can borrow or lend cryptoassets without needing anyone's permission. You can earn interest on your direct loans to borrowers. You can also make extra income by sending your coins to a lending pool. 

In DeFi lending, when you put your tokens into a pool, borrowers can use these coins. They must have more collateral than the loan amount they want. 

The interest rates are often variable, adjusted algorithmically based on the real-time supply and demand for each asset within the protocol's pools. 

Beyond these standard lending pool models, you can find even more innovative solutions like LiquidiumWTF. Here, you can lend your BTC against assets such as Ordinals, Runes, and BRC-20 tokens.

Pros & Cons of DeFi Lending

Pros

• It's enough to have one type of asset to start lending

• Less complicated than yield farming

• Loans are overcollateralized

Cons

• Potential smart contract risks

• Often smaller returns than in yield farming

How to Get Started: DeFi Staking vs. Yield Farming vs. Lending

The first steps you need to take to begin earning yield in DeFi, whether through staking, yield farming, or lending, are quite similar. 

Let us walk you through it step by step:

• Set up a secure, non-custodial DeFi wallet compatible with the relevant blockchain.

• Fund your wallet with the necessary coins and the blockchain's native token for transaction fees (gas).

• Go to the official website/app of the chosen DeFi protocol and connect your wallet.

• Approve the protocol's smart contracts to interact with your specific tokens.

And here where the differences start to appear:

• DeFi staking: You usually deposit or stake one type of token into a specific staking contract or pool.

• Yield farming: First, you need to get two different tokens. Then, provide both tokens to a liquidity pool. In return, you will receive Liquidity Provider (LP) tokens. Often, you will then stake these LP tokens in a separate "farm" contract.

• DeFi lending: You will supply a single asset into a specific lending pool for that asset on the money market protocol.

Which DeFi Strategy Yields the Most?

Usually, yield farming might yield the most, but at the same time, it’s the most complicated and risky. However, depending on the protocol, lending might sometimes be even more profitable than yield farming. In either case, exact returns in DeFi depend on numerous factors beyond just the advertised rate. 

In DeFi staking, yield is commonly generated from a share of protocol fees, revenue distribution, or emissions of the protocol's native token. This often leads to a more stable APY range of 5% to 20%. However, special incentives or token value can sometimes raise these numbers.

In yield farming, yield comes from two main sources. First, traders pay fees when they swap tokens in liquidity pools. Second, farming protocols often provide high token emissions. These emissions can push advertised APYs to 100% or more. However, these rates depend on the reward token's price and carry higher risks.

In DeFi lending, yield is generated directly from the interest paid by borrowers who utilize your deposited funds. These variable interest rates, algorithmically adjusted based on supply and demand, commonly result in APYs up to 15%. However, Liquidium stands apart from typical DeFi lending since it presents a 380% APY opportunity for those wanting to offer their BTC to borrowers. 

Explore Non-Custodial Bitcoin Lending on LiquidiumWTF

When you lend your BTC on LiquidiumWTF, you can earn up to 380% APY in a safe, non-custodial environment. 

Holders of Bitcoin Layer 1 assets like Ordinals, Runes, and BRC-20 tokens often view these as valuable, long-term holdings they are eager to keep. 

When these holders need bitcoin liquidity, they have a compelling reason to borrow against their assets rather than sell them. Therefore, borrowers are willing to pay you a premium in interest to access your BTC and retain ownership of their unique collateral at the same time. 

Needless to say, it creates a great opportunity for you to earn yield on your BTC by lending it on Liquidium.

Connect your wallet to Liquidium to start earning up to 380% APY on your BTC.

Disclaimer: This article does not constitute financial advice, and we strongly recommend conducting your own research and consulting with a professional financial advisor before making any investment decisions. We are not liable for any potential losses incurred from applying the strategies discussed. Proceed with caution and at your own risk.

FAQs

Is yield farming the same as staking?

No, yield farming and staking are distinct strategies in DeFi, though both involve locking cryptoassets to earn rewards. Staking normally involves committing a single asset to support network operations or protocol governance. Yield farming, conversely, requires providing a pair (or more) of assets to a liquidity pool to facilitate trading and earn fees, plus additional tokens.

What is the difference between lending and staking?

The difference between lending and staking is that, in DeFi lending, you earn yield by supplying your assets to borrowers through a protocol, receiving interest payments in return. Meanwhile, DeFi staking involves committing your assets to a protocol to help secure the network or participate in governance, earning rewards from the protocol or network itself.

Lending yield comes from borrower demand, whereas staking yield is usually derived from protocol emissions, fees, or network rewards.

What is the difference between yield farming and lending?

Yield farming implies putting two different tokens together in a pool so people can easily swap them, and you earn fees from those trades, plus extra rewards. Lending is simpler; you put just one token into a pool, and people who borrow it pay you interest. The main difference is putting in pairs of coins versus just one, and earning from trading fees/rewards versus earning from borrower interest.

Is staking safer than yield farming?

Generally, staking is considered less risky than yield farming. Yield farming can be risky because your money in the pool might end up being worth less than if you just kept it. This is called impermanent loss. Staking, especially single-asset staking, by and large avoids this specific risk.

Can I use bitcoin for yield farming?

Yes, you can use bitcoin for yield farming, but typically not in its native form directly on most DeFi protocols. You usually need to use a tokenized version of bitcoin, such as wrapped bitcoin (WBTC) or other bridged versions. These wrapped tokens can then be paired with other assets in liquidity pools on various DeFi platforms to earn yield.

Is yield farming still profitable?

Yes, yield farming can still be profitable, but it's highly variable and depends on many factors. Profitability is influenced by market conditions, trading volume, token prices, and other factors. It requires careful research and active management rather than being a guaranteed return.