Yield Farming vs Staking

Share This Post

Investors are flooded with opportunities to earn passive income on their crypto holdings.

Two of the most talked-about methods are staking and yield farming. While both promise rewards, they operate differently—and choosing the right one can significantly affect your risk and return.

So, which should you choose?

Let’s break down yield farming vs staking and help you decide what’s best for your portfolio in 2025.

What Is Crypto Staking?

Staking is the process of locking up your crypto in a proof-of-stake (PoS) blockchain network to support its operations—such as transaction validation and security. In return, you earn staking rewards, usually in the form of additional tokens.

✅ Key Benefits of Staking:

Low technical barrier to entry
Predictable APY (3–10%)
Often less risky than yield farming
Long-term alignment with network security

⚠️ Risks:

Token price volatility
Lock-up or unbonding periods
Slashing risk (on some networks)
Limited DeFi composability (unless using liquid staking tokens like stETH or mSOL)

🔄 Popular Platforms:

Ethereum (via Lido or Rocket Pool)
Solana (via Marinade Finance or Jito)
Cardano and Polkadot

What Is Yield Farming?

Yield farming (also known as liquidity mining) involves providing liquidity to DeFi protocols in exchange for rewards. Users deposit pairs of crypto assets into liquidity pools on decentralized exchanges (DEXs) like Uniswap, Curve, or PancakeSwap and earn yields from trading fees and token incentives.

✅ Key Benefits of Yield Farming:

Higher potential returns (10–100%+ APY)
Rewards in multiple tokens
Often immediate access to funds (no lock-up)
Integrated with broader DeFi ecosystem

⚠️ Risks:

Impermanent loss (see below)
Smart contract exploits or rug pulls
High volatility of reward tokens
Frequent manual management required

🔄 Popular Platforms:

Uniswap, Curve, Balancer (Ethereum ecosystem)
PancakeSwap (BNB Chain)
Radiant, GMX, Aave (cross-chain or Arbitrum)

Understanding Impermanent Loss: The Hidden Risk of Yield Farming

One of the most misunderstood risks in DeFi—especially for newcomers to yield farming—is impermanent loss (IL).

💡 What Is Impermanent Loss?

Impermanent loss occurs when the price ratio of tokens in a liquidity pool changes, causing your share of the pool to be worth less than if you had simply held the tokens.

The loss becomes permanent when you withdraw. If one token rises dramatically in value compared to the other, you’ll hold less of the appreciated asset than you would by holding both tokens separately.

📉 Example:

You add $500 in ETH and $500 in USDC to a pool.
ETH doubles in price while USDC remains stable.
The pool auto-rebalances, leaving you with less ETH and more USDC.
Despite earning fees and rewards, your total value could be lower than if you held ETH directly.

🔍 When Is IL Most Dangerous?

During high volatility
When yield farming volatile token pairs
When rewards are too low to offset the loss

✅ How to Minimize It:

Use stablecoin pairs (e.g., USDC/DAI)
Choose low-volatility pairs like ETH/stETH
Look for IL protection protocols (e.g., Bancor v3)
Monitor and rebalance your position frequently

Risk Type	Yield Farming	Staking
Impermanent Loss	✅ Common in volatile pools	❌ Not applicable
Smart Contract Risk	✅ High (complex protocols)	✅ Medium (esp. custodial staking)
Volatility Risk	✅ High (token prices & rewards)	✅ Medium (token price only)

Check out our Impermanent Loss Calculator Here

Yield Farming vs Staking: Key Differences

Feature	Staking	Yield Farming
Risk Level	Lower	Higher (impermanent loss, smart contracts)
APY Range	3% – 10%	10% – 100%+ (but volatile)
Ease of Use	Beginner-friendly	Requires more active management
Liquidity	Often locked or delayed withdrawal	Usually liquid, but depends on pool
Earnings Source	Block rewards, transaction fees	Trading fees, platform rewards
Best For	Long-term holders, passive investors	DeFi-savvy users seeking high returns

When Should You Choose Staking?

Staking is better if you:

Plan to hold assets long-term
Want lower risk and steady yields
Are new to DeFi or want a set-it-and-forget-it strategy
Prefer platforms like Lido, Rocket Pool, or Marinade

When Should You Choose Yield Farming?

Yield farming is better if you:

Want to maximize short-term returns
Are comfortable with DeFi tools and smart contract risks
Can actively manage positions and rebalance frequently
Are exploring high-yield platforms like Curve, GMX, or PancakeSwap

Can You Do Both?

Yes. In fact, combining staking and yield farming can help you diversify and optimize yield:

Stake ETH via Lido → receive stETH → farm in Curve pools
Provide liquidity with mSOL/SOL pairs to earn while still staking
Reinvest staking rewards into yield farms for compound growth

This is often referred to as “stacked staking” or “layered yield strategies.”

Final Verdict: Yield Farming vs Staking

Goal	Recommended Strategy
Low risk, steady income	✅ Staking
High risk, high reward	✅ Yield Farming
Beginner in crypto	✅ Start with Staking
Active DeFi user	✅ Try Yield Farming
Want passive exposure to both	✅ Use liquid staking tokens in DeFi

Tax and Legal Considerations

Staking rewards are usually taxed as income when received.
Selling or swapping staked tokens or farming rewards may incur capital gains.
Yield farming returns often involve multiple tokens, each with tax implications.
Regulators (especially in the U.S.) are increasing scrutiny on centralized staking services.

Always consult a tax professional

For expert assistance in managing your crypto tax obligations and to experience the peace of mind that comes with precise tax filing, don’t forget to explore our cutting-edge crypto tax preparation service. Your financial clarity and confidence start here.

Your subscription could not be saved. Please try again.

You're in. Welcome to Macro Degen—your inbox just got smarter.

More To Explore

Guides

Yield Farming vs Staking

May 14, 2025

Guides

Is Staking Crypto Worth It?

May 14, 2025

Start simplifying your crypto tax preparation today!

drop us a line and keep in touch

Your subscription could not be saved. Please try again.

You're in. Welcome to Macro Degen—your inbox just got smarter.