Power traders use staking and power generation farming to generate passive income, but there are also risks.

You’ve seen a number of crypto-related Super Bowl commercials by now, and you’ve probably found them strange, deeply dystopian, or just eerily familiar. That’s probably true. Still, you may still believe there are financial benefits to be gained from blockchain and want to jump in, or you may have already invested in it through companies like Coinbase and FTX, which are promoting during the big game. may have part of it fixed in cryptocurrencies.

What now? Tracking the ups and downs of Bitcoin, Ethereum, and other cryptocurrencies and actively trading their fluctuations can become a full-time job. It’s basically day trading. And getting started with NFTs, digital gadgets that can be minted, bought and sold, remains difficult for many people.

For many medium- to long-term crypto traders, there is another way to make money with the cryptocurrencies you have in your crypto wallet. It’s staking and yield farming on DeFi networks. “DeFi” is just an umbrella term for “decentralized finance” and almost all blockchain-based services and tools for currencies and smart contracts.

In essence, staking cryptocurrencies and yield farming are almost the same thing. This involves investing funds in a crypto coin (or several at the same time) and collecting interest and fees from blockchain transactions.

Staking vs Yield Farming

Staking is easy. This typically involves holding cryptocurrencies in an account and collecting interest and fees when these funds are passed to a blockchain validator. When a transaction is enabled by a blockchain validator, a portion of the fees incurred are paid to the stakeholders.

This type of interest rate lock is very popular and is offered by mainstream crypto traders like Coinbase. Some tokens, such as the highly stable USDC (fixed to the US dollar), offer annual interest rates of around 0.15% (not that different from putting your money in a low-interest bank checking account). You can earn 5-6% per year. Some services require staking to lock up your funds for a certain period of time (meaning you can’t deposit or withdraw them at any time) and may require a minimum amount to earn interest.

Yield farming is a little more complicated, but not much different. Yield farmers often add funds to liquidity pools by pegging multiple types of tokens at once. For example, a liquidity pool that pegs Raydium tokens to USDC can create a composite token that can earn a 54 percent annual percentage rate (APR). This seems ridiculously high, but it’s even stranger. Some new highly volatile tokens may be part of a yield farm offering hundreds of percent APR and 10,000 to 20,000 APY (APY is similar to APR but takes into account compound interest.).

Rewards accumulate 24/7 and are typically paid out as harvestable crypto tokens. These harvested coins can be reinvested into liquidity pools, added to yield farms for bigger and faster rewards, or withdrawn and converted into cash.

It may sound too good to be true, but it’s not. Yield farming is riskier than staking. Tokens that offer such high interest and fee yields are also the ones most likely to suffer significant declines if the underlying token suddenly loses a significant amount of value. The term used to describe this is “permanent loss.” Anything you put into a yield farm, even if you put together a fee package, may be worth less when converted into cash due to the market value of the tokens.

Some DeFi services offer leveraged investing, which is even riskier. By adding a 2x, 3x, or higher multiplier to your yield farming investment, you are essentially borrowing one type of token and combining it with another type to be redeemed at a higher effective annual interest rate. You will pay a security in the hope that it will. However, if you make a wrong bet, your entire holding may be liquidated, and you may only get back a portion of your original investment.

Those new to yield farming should avoid pools with low liquidity. This is measured in the DeFi world as “TVL” or “Total Value Locked” and indicates how much money has been invested in a particular liquidity pool, currency, or exchange in total.

And, like other types of digital networks, DeFi services are vulnerable to hacker attacks, programming flaws, and other disruptions and issues beyond their control. Earning a good, steady return may require more effort than you’d like for “passive income.” Monitoring the value of your tokens and switching from one type of yield farm to another can yield good results, but it’s similar to trying to time the stock market. It can be very dangerous and may require more luck than skill.

Where to Start?

If you want to get started with staking or yield farming, you should first check whether the cryptocurrency exchange you’re already using offers these options. Binance, FTX, Coinbase, TradeStation, Kraken, and other financial services that operate cryptocurrencies may offer staking for currencies such as Ethereum, Tezos, Polkadot, and Solana.

In the field of yield farming, PancakeSwap, Curve Finance, Uniswap, SushiSwap, and Raydium are just some of the services that offer the ability to exchange tokens, add liquidity pools, and invest in yield farms. It is typically accessed through a cryptocurrency wallet, which allows you to connect to the service and deposit and withdraw funds.

Profits in yield farming can be completely volatile, and the rise of new tokens with very high APY rates often puts new yield farmers into a pool of rapid pumping and dumping. You may be tempted to participate. However, many long-term crypto fund traders see stake and yield farms that hold more stablecoins as another tool in their toolbox to generate profits from their holdings.