So far, they’ve served a variety of purposes and aims, but we must remember that cryptocurrencies are primarily financial instruments of some type. They may be used as a payment mechanism (such as Bitcoin), but they can also generate additional money by investing at the right moments and in the right places. This is true for both cryptocurrency staking and liquidity mining.
Many investors have found success with these two techniques of earning passive income while using cryptocurrencies and tokens. Let us go through them briefly.
What is Crypto Staking?
Proof-of-Stake (PoS) coins are what we’re talking about here. The figure of the “crypto miner” is substituted by the “validator” in these blockchains. This validator, who may be anyone (even yourself), will be responsible for validating transactions and, if required, minting new coins.
They will store a specific number of native tokens they previously obtained in a dedicated wallet. They won’t be able to utilize them for as long as they’d want (ideally), but the blockchain will reward them with brand new coins in exchange. Similar to typical crypto-miners, but with a greater initial cost.
Let’s use Alice as an example. She wanted to conduct some crypto staking using Ethereum 2.0, so she went to a cryptocurrency exchange to purchase the necessary coins (32 ETH, in this case). She sent those coins to the smart deposit contract, which was the end of it for now. Alice will receive about 8.9% in yearly interest as a reward for donating her coins, as long as the initial 32 coins are locked.
What is Liquidity Mining?
You can also use the phrase “Yield Farming” because the two terms are often used interchangeably. It might, however, be a minor variation in the hierarchy. Liquidity Mining is just one technique inside the Yield Farming niche, including more innovative ways to make money with DeFi tokens.
However, it occurs when you supply liquidity to an Automated Market Maker (AMM) when it comes to Liquidity Mining. In other words, you deposit your tokens (typically in pairs, such as DAI/ETH) in a DeFi platform’s liquidity pool.
Other users (also known as token swappers) can then lend, exchange, or utilize those tokens in general. These token swappers pay a modest transaction charge, collected and dispersed among all liquidity providers afterward (LP). If you’re still confused on how it works or how to make money with it, read this yield farming guide.
However, we should keep in mind that incentives might be given with a different token than those invested, and withdrawals can occasionally result in losses. Let’s assume Alice now wishes to contribute liquidity to the Circle Snail pool using the USDC-ETH combination. She invests both tokens in the smart contract, and she will be rewarded in SUSHI tokens, with an APY of about 10.6%. That’s it if everything goes smoothly.
Crypto Staking vs. Liquidity Mining
So, which is preferable? Crypto Staking vs. Liquidity Mining: Which is Better? We may argue that it is extremely dependent on the platform and the investor. However, each approach has its own set of benefits and drawbacks.
To begin with, Crypto Staking is considerably safer than Liquidity Mining. Validators and stakes are less vulnerable to smart contract failures, which can result in millionaire platform attacks. Furthermore, they may select a platform with a brief lock period for their coins and then withdraw them (together with the incentives) when the period is up. They can choose whether or not to repeat the process.
When it comes to investments and profits, Crypto Staking is known for requiring a large initial commitment. Various PoS coins have different figures. Dash’s PoS validators need a $1,000 token deposit ($105,700) and pay an annual interest rate of about 6%. Cosmos (ATOM), on the other hand, offers multiple stake levels. The first one does not require a minimum staking amount; therefore, you can do it simply from wallets like Atomic Wallet, and the calculated profit is 8% annually. The next level (for official validators) is, however, more difficult to achieve. The whole cost exceeds $57,000.
Risks and rewards
On the other hand, liquidity mining offers larger risks and bigger profits with far fewer investments. However, we must discuss Impermanent Loss in this context. This implies that while your tokens are trapped inside a DeFi system, they may lose value, providing the liquidity required to develop incentives. If you need to withdraw or exchange that money at a specific time, this loss might be temporary or permanent.
Furthermore, perhaps you deposited X number of tokens in an equal proportion. Let’s suppose you have 50% in ETH and 50% in USDC. However, when it comes to withdrawing cash, they might offer you 30% in ETH and 70% in USDC, to put it that way. Because the liquidity pool may require more ETH for the token swappers at that time, you will most likely lose money if the ETH price rises. Will the profits from the pool fees be worth it then? Yes, or no, depending on your point of view.
That is unquestionably a variation not found in Crypto Staking. Tenders (TEND) has a larger return per staking of about 323 percent, but Liquidity Mining has more exuberant rewards. According to CoinMarketCap, the pair DAI-BNB in the pool PancakeSwap had a guaranteed 18,647 percent APY at the time of writing. However, the danger of irreversible loss is significant.
Finally, which is better: cryptocurrency staking or liquidity mining? That is debatable. Focus on how much you want to invest and how much you can afford to lose rather than how much you want to gain right away. Then there’s your response. Always remember to deal safely!