📕 Better than yesterday with BSCStation #15: Safe Invest During Bear Market Part 3

The blockchain industry is going through a Bear Market, so investors will not satisfy with just storing their digital assets and hoping that the value will appreciate; they have found ways to put their crypto to work. Of all the various ways of earning passive income on your crypto assets, Yield Farming and Staking are taking center stage.

Each method has its own way of making your crypto work, but which is the best for investors in the tough time?

In this part of Better than yesterday with BSCStation, we’ll look at Yield Farming and Staking in order to better understand how they work, their associated risks and benefits, and which strategy could better fit your goals during the Bear Market.

What Is Yield Farming?

Yield farming is a method of generating cryptocurrency from your crypto holdings. It has drawn analogies to farming because it’s an innovative way to “grow your own cryptocurrency.” The process involves lending crypto assets for interest to DeFi platforms, who lock them up in a Liquidity Pool, essentially a smart contract for holding funds.

The funds locked in the Liquidity Pool provide liquidity to a DeFi protocol, where they’re used to facilitate trading, lending and borrowing. By providing liquidity, the platform earns fees that are paid out to investors according to their share of the Liquidity Pool. Yield Farming is also known as liquidity mining.

Automated market markets (AMMs) need these pools to offer automated trading. Simply put, investors ‘lend’ their tokens to pools, which enable AMMs to facilitate further trades. This, in turn, increases the coin's trade volume and grows its value.

The Advantages of Yield Farming Cryptocurrencies

Yield farming cryptos lets users grow their investment while also having positive effects on the overall state of a coin. Once money gets added to the liquidity pool, interest rates can even rise if the demand is high.

With this method of passive investing, investors can profit from rewards, transaction fees, interest, and price hikes. And compared to mining, yield farming doesn’t require any sort of initial investment other than the cryptos already in your wallet.

What is Staking?

Compared to Yield Farming, Staking cryptocurrencies has a more ‘technical’ purpose. Instead of boosting liquidity and providing lending services, it supports the blockchain itself.

In particular, Staking is used to validate transactions on networks that use the proof of stake (PoS) mechanism. Proof of work (PoW) blockchains are much more energy-intensive and require raw computing power to create new blocks. This power is needed to solve complex mathematical problems for a chance at a reward.

PoS relies on a completely different principle. Individual users become ‘validators’ and set up nodes with their stakes. When the sending party requests a transaction, a node is chosen to verify a block at random, and the node owner gets a reward.

This way, cryptocurrency transactions don’t damage the environment. At the same time, individual investors don’t have to invest in expensive equipment or pay high electricity bills.

From that point onwards, the blockchain network can further grow. The more stakers there are, the safer the blockchain will be. Staking ensures integrity, and that integrity grows exponentially with each new stake added to the system.

If the investor chooses a network that’s still growing, then can passively invest in cryptocurrencies by following the network’s growth and holding the growing coin. So it’s a two-pronged approach.

The Advantages of Staking Cryptocurrencies

The advantages of staking in crypto are, firstly, the reward that is received from staking your tokens in the form of block rewards and other fees paid by users of the blockchain who want to prioritize their transactions before others.

In addition, by staking, you are supporting the blockchain project in question by increasing its efficiency and security. It increases the project’s ability to handle transactions and makes it more secure from attacks.

Aside from monetary gains, staking also preserves the environment. As mentioned in the previous section, staking bypasses the issues plaguing the PoW consensus mechanism. Therefore, anyone can become an investor and not think about the price of electricity or state-of-the-art computer hardware.

The Risks of Yield Farming and Staking 

Another factor that you need to consider in the yield farming vs staking debate is that of risk. There are a variety of risks associated with both investment products, which we cover below:

Opportunity Risk

The first risk to consider is specifically linked to staking. Put simply, if you decide to lock your tokens up for a minimum number of days with the view of targeting higher yields, you won’t be able to touch the funds until the term concludes.

During this time, this means that you might miss out on other, more profitable investment opportunities.

Generally, you won’t have this risk when you engage in yield farming. This is because in most cases, you will always have the option of withdrawing your tokens from a yield farming liquidity pool as and when you like.

Impairment Risk

A risk specific to yield farming is that of impairment loss. Yield farming exposes investors to impermanent loss due to fluctuations in prices from when the crypto was initially deposited.

Conversely, impermanent loss does not apply to staking.

Volatility Risk

Both staking and yield farming carry an inherent level of volatility risk. In its most basic form, this refers to the risk that the value of the tokens you have deposited into a liquidity or staking pool go down.

This means that when you eventually withdraw your crypto assets, your investment might still be worth less than what you started with – even though you have more tokens.

Perhaps volatility risk is more pressing in the case of staking, because with yield farming you can typically withdraw your tokens at any given time. While with staking, you won’t be able to make a withdrawal until the respective lock-up term concludes.

Platform Risk

You should also consider the risk of the platform you are using for staking or yield farming. After all, you will be going through a third-party platform. The only exception to this rule is if you decide to stake your tokens directly into the respective blockchain network.

Smart Contract Risk

Leading on from the above section, smart contracts at decentralized platforms are not without their risks. This is because if the smart contract was not built correctly, it might be vulnerable to hackers.

This is why you still need to do your research when choosing a DeFi platform – irrespective of whether you prefer yield farming or staking.

Conclusion

Yield farming is perhaps best suited for experienced crypto investors that are happy to take on additional risk, with the view of targeting much higher returns.

As noted earlier, when you add tokens to a liquidity pool, you will typically be able to generate a higher APY in comparison to staking. But, you are also taking on the added risk of impairment loss. 

On the other hand, yield farming is also suitable for those of you that want more flexibility when it comes to accessing your tokens.

This is because you typically have the option of withdrawing your crypto assets from a yield farming pool at any time – without restrictions.

Staking will be best suited for those of you that want to know exactly how much you will make in return for locking away your tokens.

With that being said, staking might not be suitable for you if you require instant access to your funds. This is because, once the tokens are locked into an agreement, you won’t be able to access them until the term concludes.

If this is the case, then perhaps it is worth searching for a flexible staking agreement. While this will yield lower APYs, you can, at the very least, be able to withdraw the tokens at any time.

🙌 Staking BSCS tokens with tempting APY to earn guaranteed allocation for IDO projects on BSCStation Launchpad is a safe and recommended investment option during the Bear Market.

About BSCStation

BSCStation - The fully decentralized protocol for launching new ideas. An all-in-one Incubation Hub with a full-stack Defi platform across all main blockchain networks. We provide exclusive services including IDO/INO Launchpad, Yield farming, NFT Auction, Marketplace, and BSCSwap

BSCStation operates on top of all the main blockchain networks and is designed to offer maximum value to consumers and institutions.

BSCStation platform uses the Sharing Economy Model for the purpose of profit-sharing, helping users to access DeFi platforms in the easiest, safest, and most cost-effective way. BSCStation is the most convenient bridge to connect users and application products on all main blockchain networks.

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The information provided in this article is intended for general guidance and information purposes only. Contents of this article are under no circumstances intended to be considered as investment, business, legal or tax advice. We do not accept any responsibility for individual decisions made based on this article and we strongly encourage you to do your own research before taking any action.