Transcription
What's up? My name is Caroline, and this is Wealth in Progress, where you'll learn how to make passive income with cryptocurrencies.
Today, we'll take a look behind the scenes of the two most common passive income options with cryptocurrencies, and will compare yield farming versus staking. We'll look at what both terms mean and how you can take advantage of each of them.
Now, distinguishing those two terms can actually be really confusing. It took me a whole lot of time to do this research, and to be honest, I still haven't found a 100% clear definition of each term, and they sometimes get used interchangeably or they get used for different meaning. I'll just go over the basics and show you where those terms appear and how they differ in terms of the rewards that you get or the risks that are involved.
While the end result is similar, meaning you lock up your coins and you get rewards for it, the purpose of yield farming versus staking is actually very different. With yield farming, the purpose is to get the highest yield possible. Well, for staking, it is to secure the network, and for that service, you get a reward.
However, on those new decentralized exchanges like UniSwap, PancakeSwap, and the like, they most often offer both options, meaning they offer yield farming and staking. And this staking on those platforms actually has nothing to do with that staking in the sense of securing the network. So, the main difference between yield farming and staking on those decentralized exchange platforms is that with yield farming, you get a new token, and with staking, you get the same token as you put in.
Okay, so let's look at that in a bit more detail. Let's start with yield farming. As a yield farmer, you provide liquidity for a decentralized exchange. As a reward, you get part of the fees that get generated through the use of that exchange, and that is usually the exchange token. So, for instance, on PancakeSwap, that would be CAKE.
In order to do that, you add liquidity to a liquidity pool. These are actually often called farms because you're yield farming. So, I'll show you that on PancakeSwap in a minute, but what those pools or farms do is that they power the marketplace underneath it, and that allows people to lend and borrow money, and to do that, they pay fees, and you get a part of that of those fees if you're yield farming in those farms or pools.
Okay, so now let's look at what that looks like on PancakeSwap. So, yield farming is, this is PancakeSwap, and yield farming is under farms. And as you can see, it's these are always pairs. So, you need to stake. So, this is where the confusion comes in. So, staking and yield farming is all intertwined, those terms. But the way I understand it is that yield farming is providing liquidity into a liquidity pool, and for that, you receive a new token, which is generally the base token of the platform. And then for staking, you receive the same token as you're staking. I'll show you that in a second.
Let's just quickly look at what that looks like on PancakeSwap. So, what you're doing with yield farming is you're always basically staking two coins at the same time. And how that works is that you need to buy an uh liquidity pool token. So, you can see that here, "Stake liquidity pool tokens to earn." I've got an ApeSwap tutorial, and ApeSwap is basically a copy of PancakeSwap, so it will it works exactly the same, and that shows you how you can get those LP tokens and stake them. So, if you're interested in that, I'll link that in the description. Make sure to check that as well.
But basically, you have to put in the same amount of each token for those two tokens, you get one LP token. So, you basically swap that for an LP token, and then you can put the LP token in here. So, you would be able to stake LP, and then you receive those APRs, those annual pushed annual percentage returns. And so that is really part of the fees that people pay to use the platform, and you get that as a reward.
Okay, now let's look at staking. If you stake coins, then you lock up your coins to have more validation power. So, this generally only works on coins on blockchains that work with the proof-of-stake concept. And that means that there are validators, and they have a certain, they lock up a certain amount of coins, and depending on how much coins they have, they're allowed to approve transactions made on the blockchain, and they're creating new blocks on the blockchain. So, they're basically, so these are like pools, and they lock up or stake their coins, and this gets them rewards because they're approving those transaction transactions, and therefore they get part of the fees.
Now, what's commonly known as staking is actually delegated staking. So, that you don't have to do any of that confusing stuff if you're staking on a proof-of-stake blockchain coin, but you're actually delegating your coins to one of those pools, to one of those validators. So, you're helping them to get more power, to have more validation power, so that they can get higher or more fees. And as a reward, you get part of the fees that that pool earns. So, this is what you can do with, for instance, Cardano, or Polkadot, or Ethereum, and that's what's commonly known as staking.
Now, if we look at those decentralized exchanges like PancakeSwap and the like, you can stake your coins on there as well, but that has, from my understanding, nothing to do with this concept of staking where you're helping to validate new transactions on the blockchain.
So, let's quickly go back to PancakeSwap. So, we've looked at farms earlier. Now, we'll look at pools. So, this is where you, where it says "Simply stake tokens to earn." So, again, it uses "stake" for both terms, which is confusing in my mind, but anyway. Um, what they mean is that you put your coins in there, and you receive a reward, a reward. So, that's basically the top term. Staking can be used for many things, and on those decentralized exchanges, it's used very loosely. But the main difference is in here that you only stake one coin. So, for instance, you can stake CAKE, or a bunch of other coins, but it's always just one coin, and then you receive a reward and APY for that. So, you can see I'm staking about six and a half CAKE in here, and it's actually this one is auto-staking, meaning it's compounding. So, all the rewards immediately immediately get re-staked in the pool. So, that's pretty cool.
So, if you want to make passive income on decentralized exchanges, just remember that with yield farming, which is also called liquidity mining, you basically stake two coins at the same time. You receive an LP token for that. So, you're taking that LP token, and you receive a different coin than the LP token that you're staking. Most often, you're receiving the platform's coin. On PancakeSwap, that is CAKE. And to access those yield farming opportunities, it's often called something like "farms."
On the other hand, staking means that you only put in one kind of coin, and you receive the same coin as a return. So, these are the two terms on decentralized exchanges. If we look at staking on proof-of-stake platforms or blockchains, then that's a kind of different thing. I'll soon be coming out with a video about Cardano staking, so make sure to subscribe and hit that notification bell to get notified when that comes out, if that's something that interests you as well. And that looks pretty different than this kind of staking and also has a different background and functionality, as I've mentioned earlier.
So, to wrap up, let's look at which option is better. So, yield farming and staking on decentralized exchanges usually have an insanely high APY or APR. So, this means you get very, very high returns, and that of course comes at a cost, and that means it's pretty risky. That's why the returns are so high because these platforms are really new, and there have been hacks, or sometimes the code is not too good, and there can be issues, meaning that you might lose your tokens, or it might just decrease in value a lot because people are just not using it anymore all of a sudden. So, things like that happen, and they try to compensate that with a very high APY.
I've recently made a video about ApeSwap, how I used to earn a very high return on that. Unfortunately, it has decreased a lot in value. So, this is a perfect example, and this is why I'm always warning to only put in money that you can afford to lose. So, while you get a high return, it doesn't help you if it decreases like 80% or 90% in value. It doesn't matter if you do yield farming or staking on those decentralized exchanges, you have the same issue that this can decrease in value, or they can be hacks. So, overall, high returns, but high risk.
Now, staking in the sense of providing validators with more coins, like on Cardano, is a pretty safe option. So, if you do it with a Cardano wallet, as I'll show in my other video, in my future video, then you get a much lower return, or much lower API compared to those decentralized exchanges. So, it's usually about, at the moment, I think it's at about 5%, which I think is still pretty awesome because it's free money on top of your gains. But compared to what we've seen on, where was it, PancakeSwap, it's at 145% APY. I mean, that's insane.
So, overall, you have to determine for yourself: Are you willing to take high risk and therefore get high rewards? Or do you prefer the safe route and therefore go with staking on, for instance, Cardano, Polkadot, Ethereum, or all the other proof-of-stake networks that are out there? So, this is the choice that you have to make for yourself.
Me personally, I'm using both options. So, I like to try out more risky options, but as we've seen with ApeSwap, it can go downwards, and it can, like, I've lost money with it. That's just how it is, but I was willing to take the risk to try that. And then I'm also staking Cardano. I've been doing that for since it came out, pretty much over half a year now, and it's just getting me steady returns, which is really awesome.
All right, so that's it. That's the comparison between yield farming and staking. I know it's confusing. I'm still not 100% sure if all of this is exactly how all the pros would determine it, and that's just because everyone seems to use those terms differently. They seem to use it very loosely and very interchangeably. But I hope you got a better grasp of generally what's going on and when we speak of yield farming and when of staking.
If you still have open questions or concerns, or something's unclear, leave a comment down below, and I'll try to get back to you as soon as possible. Also, if you'd like me to cover any other projects or explain terms or anything like that, leave a comment. I'm happy to look into that. If you like this video, hit the like button down below, share with your friends, and be sure to subscribe. Thanks for watching, and I'll see you in the next video. Bye.