Power traders use “staking” and “yield farming” to generate passive income, but there are risks.
You saw the many cryptocurrency-related Super Bowl ads, and maybe you found them weird, or deeply dystopian, or just disturbingly familiar. Nevertheless, perhaps you believe the blockchain has financial rewards left to reap and want to jump in, or you’ve already got some of your money tied up in cryptocurrencies via companies like Coinbase and FTX that were advertising during the big game.
What now? Keeping track of the ups and downs of Bitcoin, Ethereum, and other crypto coins and actively trading on those fluctuations can be a full-time job. Day-trading, basically. And jumping into NFTs, the digital baubles you can mint, buy, or sell, is still daunting for many.
For many crypto traders who are in it for the medium to long haul, there are some other ways to make money on cryptocurrency that’s just sitting in your crypto wallet: staking and yield farming on DeFi networks. “DeFi” is just a catchall term for “decentralized finance”—pretty much all the services and tools built on blockchain for currencies and smart contracts.
At their most basic, staking cryptocurrency and yield farming are pretty much the same thing: They involve investing money into a crypto coin (or more than one at a time) and collecting interest and fees from blockchain transactions.
Staking is simple. It usually involves holding cryptocurrency in an account and letting it collect interest and fees as those funds are committed to blockchain validators. When blockchain validators facilitate transactions, the fees generated go, in part, to stakeholders.
This type of hold-for-interest has become so popular that mainstream crypto dealers like Coinbase offer it. Some tokens, such as the very stable USDC (pegged to the US dollar), offer about .15 percent annual interest rates (not too different from putting your money in a bank in a low-interest checking account), while other digital currencies might earn you 5 or 6 percent a year. Some services require staking to lock up funds for a certain period of time (meaning you can’t deposit and withdraw whenever you want) and may require a minimum amount to draw interest.
Yield farming is a little more complicated, but not that different. Yield farmers add funds to liquidity pools, often by pairing more than one type of token at a time. For instance, a liquidity pool that pairs the Raydium token with USDC might create a combined token that can yield a 54 percent APR (annual percentage rate). That seems absurdly high, and it gets stranger: Some newer, extremely volatile tokens might be part of yield farms that offer hundreds of percent APR and 10,000 to 20,000 APY (APY is like APR but takes into account compounding).
The rewards, which add up 24/7, are usually paid out as crypto tokens that can be harvested. Those harvested coins can be invested back into the liquidity pool and added to the yield farm for bigger and faster rewards, or can be withdrawn and converted to cash.