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As a new investor, decentralized finance (DeFi) can seem intimidating and complex. The purpose of this DeFi Farm 101 guide is to introduce you to staking and yield-farming in DeFi.
“Staking is the process of actively participating in transaction validation (similar to mining) on a proof-of-stake (PoS) blockchain.” – Coinbase
In simple terms, when you stake your tokens into a pool, you’ll get a percentage share of the earned profit if your staked tokens are selected (these selections are random) every time a new transaction is validated. That’s why the bigger your share of the pool, the higher your share of profit will be.
Yield Farming, sometimes called Liquidity Mining, is a terminology that you’ll often find in the DeFi space. Yield Farming is similar, in its core utility, to staking with more complexities behind the scenes. But the core idea remains the same: you lock your cryptocurrencies and earn mined rewards for the validated transactions.
In Yield Farming you’ll usually find two options to earn rewards:
In the picture below you’ll see Liquidity Pools from the DeFi platform pancakeswap.finance. When we select the Farms menu on the left (some DApps might use different terminology for their project, but the idea will remain the same, providing liquidity pools or staking a single token on their pools), a new page is loaded with all active Farms.
Let’s say, for example, we choose CAKE-BNB. When we provide liquidity to this trading pair, we’ll earn a percentage of the trading fees that a trader has to pay every time he swaps his CAKE to BNB (or vice versa) in that pool.
When we select the Pools menu on the left, a new page loads, which includes single token pools that you can participate in to earn rewards. Pancakeswap names these pools “Syrup Pools’.
You’ll now see the option to stake CAKE (PancakeSwap’s native token) to earn different types of tokens, usually for a limited period of time. There are two types of staking on Pancakeswap:
By staking your tokens, you are providing liquidity for the project, and you’ll earn rewards whenever a transaction is successfully validated.
Staking in DeFi means you can participate, by utilizing smart contracts, on various issues via voting in a proof-of-stake model as well as earning passive rewards by locking up their crypto.
When you start staking, you send your assets to a smart contract which locks them up. Once your stake is locked up, you are able to vote to approve (or validate) transactions.
In general, staking rules are distinct for most networks and DApps:
To help you get started with staking and yield-farming, we wrote the “Start Yield-Farming Within 20 Minutes” guide (link once published) for you. This guide helps you to set up everything needed in order to start Farming or Staking.
Unlike staking, liquidity pools have several risks. Before you start yield-farming with liquidity pools, please read our guide about liquidity pools so you understand what they are, how they work and what the risks are of providing liquidity.
By now you should have a better understanding of what the basics of staking and yield-farming are. Make sure to read our other articles and guides on wiki.rugdoc.io as well!
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