Liquidity Mining/Provider vs Staking vs Yield farming — How to earn Passive Income

5 min readJun 7, 2021

Due to the highly volatile crypto market, most crypto users are encouraged to “HODL” their crypto assets for higher returns. However, due to fluctuations in the crypto market, most users are unable to meet their objectives. Today, three methods, crypto staking, and liquidity mining, and yield farming are common ones where users invest their crypto assets and earn a passive income.

All these terms for someone new to DeFi space make it difficult to understand them or differentiate between them. This article will deeply give an insight into all terms and how we can earn passive income on them.

Liquidity Mining/Provider:

Decentralized exchanges provide a robust mechanism to offer investors alternative methods to swap or exchange their crypto assets in this method of crypto investment. The most famous Decentralized exchange which offers this mechanism is Uniswap, which staked $4 billion in crypto to provide liquidity. By providing liquidity to these exchanges, users earn a fair amount of fee, which ranges between 15% and 25% annual rate.

Why need of liquidity:

Liquidity is provided to make funds available for swapping or exchanging crypto assets. Most decentralized exchanges provide token incentives along with a portion of the transaction fees of swapping or exchanging on different exchanges.

Decentralized exchanges (DEXs) use these methods to achieve maximum liquidity, and rewards have been given to those users who bring capital to these platforms. In order to remain decentralized, most exchanges use the method of order books, which in this case is Automatic Market Maker (AMM), a smart contract approach to regulate the market.

The bottom line, Liquidity is the funds available in the liquidity pool.

Staking:

Staking the process of locking cryptocurrencies in the crypto wallet. In providing the liquidity we are depositing our funds in a pool but in the case of staking, we are simply locking up the cryptocurrencies.

Before we jump into the nitty-gritty of staking, It is crucial to understand types of staking.

Decentralized Staking / PoS ( Proof of stake )
Centralized Staking

Decentralized Staking:

The Proof of Stake (PoS) concept states that a person can mine or validate block transactions according to how many coins they hold. This means that the more coins owned by a miner, the more mining power they have. A person can look up their tokens on the blockchain which will give them authority to validate the next block on the blockchain.

Upon the validation of the block on the blockchain, there are rewards for the stakers in the form of native tokens.

Centralized Staking (also known as Lending):

Centralized staking is somewhat different from decentralized staking. The primary distinction between lending and staking is that staking requires you to give up direct access to your assets in exchange for a higher rate of return.

Various lending platforms, like as BlockFi, Nexo, or Crypto.com, connect lenders with borrowers and profit from the difference. You put your money in their custodial wallets and get a pre-determined rate of return. Most of these services require you to lock up your bitcoin for a set period of time.

Simply, we can earn passive income through staking crypto assets via decentralized or centralized platforms.

Yield Farming:

Yield farming is simply maximizing the yield on your capital investment. Since the evolution of DeFi protocols, there have been numerous opportunities for generating maximum yields.

Broadly, yield farming is a process to put crypto-assets to work and generate the most returns possible on those assets. There can be a lot of ways to generate maximum yields. The trends of yield farming started when the DeFi lending protocol “COMPOUND” starting giving Comp tokens for the lenders and borrowers. Comp is the native token of Compound Platform.

In simple words, a yield farmer may transfer assets around inside the Compound, always chasing the pool with the highest APY from week to week. This may need shifting into riskier pools on occasion, but a yield farmer is capable of managing risk.

Famous decentralized exchanges provide the opportunity for yield farming. Let’s take pancakeswap as an example and see how one can generate maximum yield on the pancakeswap.

For participating in yield farming, one has to provide liquidity on the pancakeswap liquidity pool.

The user has to submit pair of bep20 tokens (crypto assets) in the pool. In return, they will get LP tokens.
So our capital investment was pair of bep20 tokens which generate the yield in the form of Lp tokens along with transactions fees

In order to maximize yield on top of generated yield, the user will stake the Lp tokens in the farm pool. Meaning by that, generated yield ( Lp tokens ) is staked in the Farm Pool in order to generate more yield. Farming the Lp tokens will generate yield in the form of a native token.
The native token of PancakeSwap is “CAKE which has a real value in the crypto market.

So, just providing the liquidity in the pool and staking those Lp tokens in the farms has maximized the yield on your capital investment i.e pair of bep20 tokens.

Wrap Up:

So, If you want to earn passive income on your crypto assets, one can easily make do it by using serval different methods such as lending, staking, and yield farming. All that is required is for you to be aware of all the possibilities accessible to you and then select the best one to meet your investing objectives. If you’re a long-term investor, you can take advantage of income-generating possibilities that are less risky than those accessible to short-term investors. When you want to attempt something new, it’s a good idea to do some research to see whether the opportunity fits your overall goals and risk tolerance. This is not easy as it sounds. This will take us to the next level which will be possible for a lot of experience in this field.