Staking vs Yield Farming vs Liquidity Mining: Beginner-to-Advanced Guide
Understanding staking vs yield farming vs liquidity mining can be tricky, especially if you’re unsure how they differ. With so many options offering rewards, it’s hard to know where to start or which one suits your goals.
This confusion can lead to missed opportunities or risky choices. Beginners often hesitate, worried about scams, volatility, or complex processes. Even experienced users struggle with balancing risks, returns, and taxes.
That’s where this guide comes in. Whether you’re new or experienced in DeFi, we’ll break down the differences, benefits, and risks of each strategy. By the end, you’ll know how to start and pick the best option for your goals.
What Is Staking?
Staking is like putting your crypto to work. You lock it up to help keep a blockchain network secure and running smoothly. In return, you earn rewards, often as extra tokens. This is a common way to earn passive income in crypto, especially on networks that use Proof of Stake (PoS), like Ethereum and Solana, instead of the energy-hungry Proof of Work (PoW) system that Bitcoin relies on.
How Does Staking Work?
In a Proof of Stake (PoS) network, participants—called validators—play a key role in verifying transactions and securing the blockchain. To become a validator, you must lock up a certain amount of cryptocurrency as collateral—this is staking. For example, on Ethereum, you need to stake at least 32 ETH to run your own validator. Your staked tokens act as a guarantee that you’ll act responsibly. If you don’t, the network can penalize you by taking a portion of your funds, a process called slashing.
But not everyone wants to handle the technical side of things. That’s where Delegated Proof of Stake (DPoS) comes in. With DPoS, you can delegate your tokens to professional validators. They do the heavy lifting, and you share in the rewards—making it a great passive income crypto strategy without much hassle.
Platforms like Lido and Rocket Pool take staking to the next level with liquid staking. Here’s how it works: when you stake, you get Liquid Staking Tokens (LSTs) like stETH or stSOL in return. These tokens represent your staked assets and still earn staking rewards. Meanwhile, you can use them for other DeFi activities, like yield farming, to boost your earnings.
For example, if you stake 10 SOL on Lido, you’ll receive stSOL tokens. You can then use these tokens in a liquidity pool to earn extra yields while still earning rewards from staking. It’s a win-win for anyone exploring the differences between staking, yield farming, and liquidity mining.
Read our in-depth guide on liquid staking to learn more.
Risks of Staking and How to Mitigate Them
Staking offers a safer way to earn rewards in crypto, but it’s not risk-free. Here’s a breakdown of the key risks and how you can tackle them:
1. Slashing Penalties: Slashing happens if your chosen validator misbehaves, such as validating fraudulent transactions or going offline. This can result in losing a portion of your staked tokens. To avoid this, select validators with strong uptime records and low slashing incidents. Platforms like Rocket Pool let you stake in a decentralized pool, reducing the risk tied to individual validators.
2. Market Volatility: Let’s say you stake 10 SOL, and its value drops significantly during your staking period. You’re locked in, so you can’t sell to minimize losses. To mitigate this, stake assets with proven long-term potential, like Ethereum or Solana
3. Regulatory Risks: Staking platforms can face sudden legal restrictions. For instance, in early 2023, the SEC cracked down on centralized staking services, leading to service shutdowns. To lower your exposure, use decentralized staking solutions like Lido, which are less likely to be affected by regulatory actions.
Beginner’s Tips for Staking
If you’re new to staking, here are some tips to get started:
- User-Friendly Platforms: Start with exchanges like Binance or Coinbase, which make staking easy and accessible.
- Self-Custodial Staking: Use wallets like MetaMask or Trust Wallet for more control over your assets. Check out our best crypto wallets lists for more options.
- Do Your Research: Always verify the credibility of staking platforms and validators before committing your tokens.
Staking is a great starting point for beginners in DeFi, as long as you take the time to research and plan ahead.
What Is Liquidity Mining?
Liquidity mining is all about adding your crypto to liquidity pools on decentralized exchanges (DEXs) to earn rewards. These rewards usually come from trading fees and platform tokens. It’s a key part of DeFi, helping ensure there’s enough liquidity for smooth trading, borrowing, and lending.
How Does Liquidity Mining Work?
Liquidity mining is about adding your crypto to liquidity pools on decentralized exchanges (DEXs) to help with token swaps. These pools, powered by automated market makers (AMMs), let users trade tokens directly without needing a centralized order book. In return, liquidity miners earn rewards from trading fees and sometimes extra perks like governance tokens.
For example, John deposits $500 in ETH and $500 in USDC into a Uniswap liquidity pool. This supports ETH/USDC trades on Uniswap, and John earns a share of the trading fees plus UNI, Uniswap’s native token.
On platforms like Bancor, John can deposit just ETH into a single-sided liquidity pool and still earn rewards while avoiding impermanent loss. Some DEXs even let him stake liquidity provider (LP) tokens for extra rewards, boosting his earnings even more.
Risks of Liquidity Mining and How to Mitigate them:
Liquidity mining can be rewarding, but it’s not without risks. Here’s what to watch out for and how to manage them:
1. Smart Contract Bugs: Yield farming depends on smart contracts, and if there’s a bug, it could be exploited. Stick to platforms like Uniswap or SushiSwap that regularly audit their contracts.
2. Impermanent Loss: Big price swings in a liquidity pool can shrink your funds. To limit this, diversify across pools and add stablecoins like USDT or USDC to your portfolio. You can also use an impermanent loss calculator to estimate risks and potential losses and plan accordingly. Read our guide on preventing impermanent loss to learn more.
3. Market Manipulation and Rug Pulls: Some projects offer high rewards to attract liquidity but later abandon the platform. Stick to reputable DEXs and avoid unknown or unaudited platforms to stay safe.
Beginner’s Tips for Liquidity Mining
If you’re new to liquidity mining, here are some tips to get started:
- Start With Major DEXs: Use platforms like Uniswap, Curve, or SushiSwap for safer and more predictable outcomes.
- Monitor Pools Regularly: Track your rewards and risks using tools like Zapper or DeFi Llama.
- Use DeFi-Friendly Wallets: Wallets like MetaMask make it easy to interact with DEXs and manage your liquidity positions. Check out our list of the best DeFi wallets for more options.
Liquidity mining is more complex than staking or yield farming. It involves managing token pairs, dealing with impermanent loss, and using advanced DeFi platforms. The higher risks and potential rewards make it a better fit for experienced users who can monitor pools and adjust strategies for better returns.
What Is Yield Farming?
Yield farming or liquidity farming, is about providing liquidity to DeFi platforms to earn rewards. These rewards can be interest, governance tokens, or other perks offered by the platform. But wait, that sounds a lot like liquidity mining.
Well, what sets yield farming apart from basic liquidity mining is that you can take the rewards you earn and use them to provide liquidity on another platform, earning even more rewards. It’s like putting your rewards to work, and you can repeat this process multiple times to maximize your earnings.
It’s a bit more complicated than staking or liquidity mining, but it’s popular with people looking for bigger returns in a shorter time.
Why?
There could be multiple reasons, but mainly because yield farming provides some of the highest APYs in DeFi, especially during new project launches. Moreover, many platforms reward users with governance tokens that can increase in value over time.
How Does Yield Farming Work?
Yield farming works by using liquidity pools—smart contracts that hold funds for decentralized trading, lending, or borrowing. When you add your crypto to these pools, you’re providing liquidity to the platform. In return, you earn rewards like trading fees, interest, or platform tokens. You can then take the tokens you earn as rewards and use them on other DeFi platforms to keep earning even more rewards.
For example, Lisa deposits $1,000 worth of USDT into a liquidity pool on Aave. She earns interest and additional rewards in AAVE tokens. To boost her returns, Lisa borrows ETH using her USDT as collateral and stakes it on a platform like Lido. This creates a layered strategy for earning more rewards.
Experienced yield farmers often move funds between platforms to chase the best APYs (annual percentage yields). It’s a dynamic strategy, but it requires regular monitoring and quick decisions.
As for the risks of yield farming, they are pretty much the same as the risks of liquidity mining, staking, or most other DeFi protocols.
Beginner’s Tips for Yield Farming
If you’re new to yield farming, here are some tips to get started:
- Start Simple: Use stablecoin pools for lower volatility and easier management.
- Track Returns: Use tools like DeFi Pulse or Zapper to monitor APYs and identify profitable pools.
- Stay Informed: Research each platform thoroughly before depositing funds to avoid scams or poorly managed pools.
Yield farming is a solid passive income crypto strategy for intermediates. What makes it even better than staking or liquidity pools is that you can combine the other strategies for even higher returns.
Key Comparisons: Staking vs Yield Farming vs Liquidity Mining
Here are the key differences between staking, yield farming, and liquidity mining summarized in a table:
| Factors | Staking | Yield Farming | Liquidity Mining |
| Risk Level | Low | Medium | High |
| Complexity | Moderate | High | Highest |
| Expected Returns | Beginner-friendly | Intermediate | Advanced |
| Token Requirements | Native tokens only | Any compatible token | Token pairs |
| Time Commitment | Long-term investment | Short- to medium-term | Short- to medium-term |
Tax Implications
Tax rules for staking, yield farming, and liquidity mining boil down to this: rewards you earn are taxed as income based on their value when you receive them (called the fair market value or FMV). Selling or swapping those tokens later triggers another taxable event, subject to capital gains tax.
For example, if you stake 10 ETH and earn 0.5 ETH as a reward, the 0.5 ETH is taxed as income when you receive it. If ETH’s price goes up and you sell the reward later, you’ll owe capital gains tax on the profit.
Things get trickier with liquid staking and yield farming. Let’s say you stake ETH and get stETH in return. In some places, receiving stETH might count as a trade, triggering capital gains tax on its FMV, even though your ETH is still locked.
Using stETH for liquidity mining or yield farming adds more taxable events. For instance, swapping stETH for another token at a higher value than its original FMV creates a new capital gain.
Tracking all these transactions can get messy. While tools like Bitcoin.Tax can help calculate gains and income automatically using your transaction logs, most of these DeFi activities fall in the gray area of taxation. So, consulting a crypto tax expert if you’re unsure is always a good idea.
Which One Should You Choose – Staking vs Yield Farming vs Liquidity Mining
Choosing between staking, yield farming, and liquidity mining depends on your experience, goals, and risk tolerance. Let’s break it down:
For Beginners: Start with Staking
Staking is simple and low-risk, making it ideal for beginners. If you own tokens like ETH or ADA, you can stake them on platforms like Binance or Coinbase. If you want more control, try self-custodial staking using wallets like MetaMask and pick reputable validators to avoid slashing risks.
For Intermediate Users: Step Up to Yield Farming
If you’re ready for more complexity and higher returns, yield farming is a great next step. Start with stablecoins like USDC or DAI on platforms like Aave to earn interest and governance tokens. Reinvesting these rewards into other pools will boost your yield but be ready for active monitoring to avoid impermanent loss or smart contract risks.
For Advanced Users: Dive Into Liquidity Mining
Liquidity mining is best for experienced users who understand DeFi. It involves providing token pairs, like ETH and USDC, to liquidity pools on DEXs like Uniswap. In return, you earn trading fees and tokens like UNI. Advanced platforms like Bancor offer single-sided liquidity options to minimize impermanent loss. However, it demands regular tracking of token prices and market changes.
How to Level Up: A Simplified Guide
- Start with staking to learn the basics.
- Gradually allocate funds to yield farming for higher rewards.
- Once confident, try liquidity mining for advanced strategies.
FAQs
Is staking better than yield farming?
Staking is simpler and less risky, making it great for beginners. Yield farming offers higher rewards but is more complex and risky. Choose based on your experience and goals.
Is liquidity mining the same as yield farming?
No, liquidity mining and yield farming are similar but not the same. Liquidity mining focuses on providing token pairs to liquidity pools on decentralized exchanges (DEXs) to earn trading fees and platform tokens.
Yield farming, on the other hand, involves using these rewards in different DeFi strategies to maximize returns. While they overlap, liquidity mining is a specific method within the broader concept of yield farming.
What’s the minimum investment required for each method?
The minimum investment depends on the platform and the cryptocurrency you’re using:
- Staking: Some platforms, like Binance or Coinbase, let you start with as little as $1 worth of crypto. However, networks like Ethereum require a minimum of 32 ETH for solo staking.
- Yield Farming: This varies by platform, but many DeFi platforms require at least $100–$500 worth of tokens to make it worthwhile due to gas fees and other costs.
- Liquidity Mining: You’ll typically need to provide two tokens of equal value.
Depending on the platform, this could range from a few hundred dollars to more.
Always check the platform’s requirements before starting and consider transaction fees, especially on Ethereum.