The crypto world is raging right now. So many new projects and new cryptocurrency users are active on the internet. New tokens come out every day, and new technologies and ideas are introduced to the users.
If you want to be part of this world, you’re making the right decision. Investing in the blockchain industry is also a smart move, but there are various ways to put your money, and you need to know which one is the best.
In the DeFi industry, there are more different ways to make money out of your actions. For these projects, you can use your machines and assets to grow your wealth. The most common practices are yield farming, staking, and liquidity mining. Let’s see which one seems to be the best fit for you.
What is Yield Farming?
Let’s say you bought a particular amount of the HODL token and you want to make more of it. You can use yield farming to grow your funds. How does this work? You deposit your funds, or part of them, into a liquidity pool where other users and the industry itself can use them for trading needs.
Just like CeFi, where banks need to have the actual currency in their vaults, in DeFi, the traders must have the actual cryptocurrency to allow fast and seamless trading. When you provide your funds for this, you earn interest and make profits.
This method is considered a high-risk investment, as the assets you are investing, can be liquidated, for example. On the other hand, you may earn tremendous amounts if there’s a lot of trading and your assets are used frequently.
What is Staking?
Staking is very similar to yield farming but still different. Staking is a part of the blockchains that use PoS technology. PoS stands for Proof of Stake, and is similar to mining that most of us know very well, but is a different kind of technology used in the crypto world.
Staking works differently than PoW (Proof of Work), or mining, because there’s no actual need of solving algorithms by powerful machines, but the staker that has more coins invested will have a higher chance to prove the transaction, thus, makes more profits out of it. Learn more about it here.
This method is arguably going to take over the better-known Proof of Work way because it spends less electricity and is a more advanced method technologically. Still, to maintain the transactions and validation processes of blockchain technologies, there will always be a need for proof.
What is Liquidity Mining?
Every DeFi project has a liquidity pool in which there are two or more different cryptocurrencies. When users need to make an exchange, the pools will provide the assets for the swap. If there are no pools, or if they are empty, the transaction won’t be possible.
The role of the liquidity providers is to throw their assets into this pool and make a profit every time someone uses them for a transaction. This is called liquidity mining. The providers don’t need to have any kind of special powerful machine to do it, and this is entirely different than the standard mining we talked about.
The risks are lower in liquidity mining compared to the others, but also the rewards are smaller when there’s a chance for it. To get more rewards, you’ll also need to invest more assets into the pools as this is going to help the transactions become seamless. See more about it here: https://medium.com/coinmonks/what-is-liquidity-mining-and-how-does-it-work-d0ab491e607.
As you can see, all three have their pros and cons. Some of them are riskier, and some are not as much. At the same time, some of them can give you a lot of profit, and others won’t as much. It’s up to you to decide what seems like the best idea, and where you should invest your assets.
It’s crucial to know that just like in the CeFi world, there’s no business that is risk-free in the Defi world. There’s always a chance for a rug pull or sudden bubble blow of the currency you invested your money in, so better invest smartly.