There are different ways to make money with cryptocurrencies. Most private individuals will have bought cryptocurrencies over time in order to sell them at a later point in time. Professional traders, on the other hand, try to make money more regularly by opening long and short positions. But there are a few other ways for “normal” investors to generate income from crypto. This also includes staking and farming. We’ll explain what these two strategies are and how they work.
Staking: Passive income through the use of tokens
The word staking is derived from the proof-of-stake (PoS) consensus mechanism. This established itself in modern blockchains as an alternative to the proof-of-work consensus mechanism, which is used, among other things, with Bitcoin. The PoS impresses with its lower computing and energy costs.
The idea behind the “stake” is that participants can block part of their tokens and make them available for validation. The network authorizes a participant at certain intervals to validate the next block in the network. The more tokens someone has staked, the higher the chance of being selected.
How does the stacking work?
Normally, people have to provide a large amount (e.g. 32 ETH tokens) for staking in order to be able to set up a node themselves and become a validator for the network. So how can the normal retail investor benefit from staking? There are also so-called staking pools.
In staking pools, several token holders pool a self-determined amount of tokens. These people act as delegators who provide their tokens to the so-called validators. The validators provide the infrastructure for staking. With staking pools, delegators have a higher chance of delegating blocks and thus receiving rewards. The rewards are then paid out in proportion to their contributions to the pool.
These staking awards are then calculated by the individual blockchains. This calculation is based on various factors such as the number of tokens staked, the length of the stake and the total size of the staking pool. These staking awards are given as a fixed percentage or as what is known as the Annual Percentage Yield (APY).
Yield Farming: Receive rewards by providing liquidity
The concept of yield farming became known with decentralized exchanges such as Uniswap or Pancake. There is no central authority providing liquidity on these exchanges. Therefore, the individual users can provide liquidity for the trades in so-called “liquidity pools” and thereby earn rewards. Through the farming, the yield farmers receive the fees of the decentralized exchanges, which are paid by other users when swapping tokens.
An automated form of yield farming is the so-called “vault”. When you deposit into a vault, it distributes your deposits to different liquidity pools. In this way, the algorithm wants to achieve optimal returns from farming.
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