Making money from cryptocurrencies is not limited to buying and HODLing the asset. Crypto yield farming or staking would be your next financial trading solution that offers a stable and guaranteed profit from the world’s most volatile market.
However, many people wonder how they can proceed with crypto yielding. Some investors think that staking is more profitable than yield farming, while others keep yielding as their first choice. The following section will uncover everything that a trader should know about a stable income from cryptocurrency trading, including buying and selling methods.
What is crypto yield farming?
Yield farming is a process of staking crypto to generate higher returns as a form of another crypto. Although it is a risky method, it applies to any volatile instrument through DeFi. As a result, yield farming has become a growth factor for DeFi sectors that helped the industry reach a $10 billion market cap in 2020.
Overall, the yield farming protocol helps liquidity providers to stake crypto or lock up the asset in the liquidity pool. Once investors receive the incentive, the transaction fee and interest from lent are returned on a percentage basis.
What is crypto staking?
Staking is holding an asset for a particular time and achieving a gain. In this way, investors can commit to the associated blockchain and allow confirming transactions.
Staking crypto is available to assets that use proof-of-stake as a validation process. It is an alternative to the previous proof-of-work model and offers less energy usage. On the other hand, the proof-of-work needs mining devices and computer power to solve complex equations while validating a transaction.
Statistically, staking would be a great source of money as crypto offers higher interest rates than the traditional financial market.
How to trade using yield farming & staking in trading strategy?
Yield farming and staking is a simple process to make money online as an alternative to trading in the crypto spot market. You can generate a huge gain if you can choose the right asset that offers a good profit with reliability.
Anyone can join yield farming through a DeFi platform where many opportunities for earning incentives and returns are available. For example, AAVE is an open-source liquidity protocol where users can borrow and lend cryptos. As a result, depositors can achieve rewards as a form of native token of the platform, AAVE. Other DeFi platforms like UniSwap, Curve Finance, and InstaApp where investors can make money through yielding.
On the other hand, if you are interested in staking, you need to find a platform that allows having this facility. After that, you can follow simple steps using the platform app or website to lock the asset for a particular time and earn rewards. Let’s see an example of staking from Binance.
Crypto yield farming
This section will see the practical approach to crypto yield farming. In that case, the primary approach is to find a DeFi platform and follow the bullish approach.
Bullish trade scenario
We aim to buy the asset and hold it for future gain in any trade. The same theory applies to crypto yield farming, where investors lock up the asset for a particular time using the following step:
- Identify a DeFi platform that provides the yield farming service.
- Send your investment to the DeFi platform to allow it to invest in yield farming projects, which are known as liquidity providers.
- Later on, the LP will provide tokens to a liquidity pool using a smart contract-based DeFi and lock the asset for a particular time.
Bearish trade scenario
We aim to short-sell a trading asset and gain profits from the selling movement in a bearish trade. However, in crypto yield farming, there is no process to take trades on the bearish side, but the amount locked in the liquidity pool will be released, known as a bearish factor for the asset.
The liquidity provider will return the investment with interest when the maturity period is over. The interest rate is generated as a percentage and returned to the investor proportionately.
In crypto staking, your investment will also be locked for a certain period but the aim of this process is different than yield farming.
Bullish trade scenario
In crypto stake, the best process is to stake through an exchange by allowing the platform to use your investment in the proof of stake process. Later on, the exchange will perform all administrative work for you. However, the process is not completely risk-free as you have to trust your coin and exchange.
Bearish trade scenario
After investment in a stake, you cannot withdraw your money until the staking period is completed. Exchanges offer to stake for one month, three months, or six months duration, and once the time is over, you can withdraw your profit immediately. Therefore, the process does not need to open any bearish trade as you will automatically receive the fund in your spot wallet.
Pros & cons
Investors are advised to invest the money in the crypto market that they are ready to lose. If you are intended to make money online without having any strong effort, staking and yield farming would be your best option. However, this method needs close attention to the uncontrollable risk.