Staking can be traced back to consensual mechanisms. To begin with, Bitcoin uses a PoW process, which is both costly and inefficient in terms of energy. Newer consensus procedures, such as Proof of Stake, were created to solve difficulties caused by the PoW mechanism. To validate transactions and get rewards in PoS, users must stake a particular amount of tokens. However, the notion of staking has since been expanded to include both centralised and decentralised exchanges, and the need for nodes and transaction validation has been removed for the vast majority of DeFi users.
That is taken care of by the exchange, and users only need to stake tk to gain rewards.
As a result, we may argue that staking entails locking funds on a specific network and being rewarded for it. Staking powers the platform and entitles stakers to rewards depending on various APYs offered by various platforms.
On DeFi platforms, yield farming is a new and unique way to make passive earnings. A user can generate passive revenue by supplying tokens to the platform's liquidity pool. The liquidity pool lends money to users, executes trades, and issues loans, among other things, while also collecting interest. The interest earned is distributed proportionally to the amount of tokens delivered to the liquidity providers.
The yield is proportional to the percentage of tokens delivered. The Automated Market Maker (AMM) mechanism is in place on DeFi systems to help with yield farming through smart contracts. The elegance of AMM's yield calculation is its simplicity. Because AMM-based yield is determined by supply and demand, it fluctuates over time, allowing LPs to select the liquidity pool with the best APY or APR.
| STAKING | YIELD FARMING |
|---|---|
| To be able to participate in the mining process, investors must stake their assets. The more assets you stake, the more likely you are to become a validator. | Investors put their assets in a liquidity pool and earn interest on the amount they put in. |
| In staking, there is no risk of permanent asset loss. | In Yield farming, there is the possibility of permanent loss. |
| The payout for staking is always in the coin that you have staked. For networks that use the Proof of Stake consensus algorithm for validation and security, staking is possible. | The reward could be in the coin you've locked in the liquidity pool or any other cryptocurrency. Automated Market Maker is the technology used by platforms that offer yield farming as an interest mechanism. |
| Staking is also a viable option for earning passive income, but the incentive is fixed. The average Annual Percentage Yield is 5%, however it can be higher. | Yield farming is a very successful business. This is the finest option for earning large income because the annual interest rate can be as high as 100%. |
| Staking requires investors to lock their assets for a predetermined amount of time. | In Yield Farming, there is no need to lock your assets for a defined period of time. |
| The PoS consensus technique is used by the networks to allow investors to stake their assets. | The Yield farming feature is provided by the network utilizing the AMM mechanism, which allows investors to lock their assets in a liquidity pool and generate passive income. |
Yield Farming is another well-known technique used by traders in the crypto industry to obtain a large return. Yield farming is a strategy in which investors put their money into the platform's liquidity pool to boost its liquidity.