Liquidity Pools VS Staking: The Battle of The Giants Simplified
Being a crypto novice is scary at first. You’re entering a new world of finance where – let’s be honest – you don’t always know what’s going on. But we’re all in this for the same thing – to join the future of finance, and find the best way to profit - passive or active. Luckily, with crypto, you have a decent pick of options. But, the short answer to this question is - the most popular strategy is yield farming.
There are different approaches to gaining a passive income via this method, but the most popular would be providing liquidity and staking. However, liquidity pools, staking, and yield farming are terms mostly used interchangeably. That’s where things can get confusing for everyone.
While these passive earning strategies are similar at their cores, you can find the differences in the fine print. You know, the thing people love to ignore. That’s why we want to talk about providing liquidity VS staking.
Simply put, liquidity pools are smart contracts that contain funds. Their purpose is to provide funds for trading on different pairs on DEXs.
But there’s more to know about these pools if you want to become a liquidity provider (LP) and start earning.
How does it work? LPs give their assets to a pool of their choice and allow other users to use these assets for swapping. It sounds simple because it is, but what’s in it for you? Annual percentage yields (APY). APY can often depend on the lock-up period you opt for, if the exchange offers it. But the average annual percentage yield you can find is anywhere from 5% to 75%. That means if you lock up $10.000 worth of tokens, you’ll earn $7.500 back by the end of your lock-up period. Naturally, the higher the percentage – the more you earn.
But what if we told you that APY can go up to a whopping 200%? It’s possible with Dexvers. Let’s do the math once again and say you’ve deposited $10.000 worth of DXVS tokens. What do you get at the end of the lock-up period? A handsome $20.000 in profits!
Liquidity pools can also have Bootstrapping periods where you can participate with your crypto assets by providing liquidity to a project you believe in, helping it develop and grow. In these situations, APYs can go through the roof because that’s how projects thank their initial investors for believing in them. Curious to see how that works and support your favorite DEX? Jump into our Zero-G liquidity pools!
Pros and Cons
We know what you’re thinking – earning rewards by being an LP is easy! Jumping to the first opportunity to provide liquidity may seem a smart choice now, but hear us out. Let’s go through the list of this strategy’s pros and cons. That’s the only way for you to make a truly informed decision. Here’s what you should know:
Adjusted value of your assets
No buyers and sellers valuing your crypto however they want
No limitation on the type of tokens or pools to provide to
Impermanent loss – the price of your token changes after you deposit it into a pool
Liquidation risk – inability to meet short-term financial obligations, resulting in liquidation
Smart contract risk – cyber-attacks and technology failures
Rug pulls – investors running away with your assets
We all know that crypto is volatile. With that in mind, venturing into liquidity pools is always a high-risk-high-reward kind of situation. So, always do research before making the final decision because that’s the only way to ensure your assets are safe.
The core definition of staking is pledging your native platform token on its DEX as collateral for blockchains that use proof-of-stake (PoS) algorithms. The simplified version is that you’re still providing liquidity but acting as a validator for creation of new blocks on a blockchain as well.
So, what’s in it for you? Passive income through APYs without selling your assets. Plus, the risks are lower because the safety of staking equals the safety of the protocol itself.
Finally, as expected, the higher the stakes – the more rewards you get. But let’s talk about the pros and cons and see what you’re really getting yourself into if you decide to start staking.
Pros and Cons
Even though liquidity pools and staking are often used interchangeably, their pros and cons look very different. While staking seems more secure, this passive earning strategy arguably has more cons. Still, let’s look at the lists before making any decisions.
You only need your assets to start – no expensive equipment
Rewards in tokens native to the platform you’re on
The value of crypto can change, affecting your assets
Long waits to get rewards
Security, for example, doesn’t have to be a risk to your crypto at all. It all depends on the project you decide to get behind. And that’s why we can’t stress the importance of doing your research before investing enough.
Key Differences Between Liquidity Pools and Staking
Finally, let’s summarize and talk about the differences. Naturally, both of these passive income strategies have their own pros and cons. It’s up to you to decide which pros outweigh the cons, but what if you’re not sure? That’s when you can look at the differences. So, here’s what can tip the scales and make you decide:
Staking usually has a fixed APY, helping you figure out exactly how much you’ll earn. The same can’t be said for liquidity pools, as they’re often more volatile.
Being a liquidity provider means you’ll earn more, but there are more risks involved.
To start staking, you can deposit only one type of token. For liquidity, tokens often have to come in pairs for you to earn your rewards.
Liquidity pools sometimes give rewards in various tokens while staking rewards you with only blockchain-native crypto.
The choice is now yours, and we wonder what it will be – liquidity pools or staking? If you’re asking us, both will give you rewards in the end. It all depends on the amount of APY you’ll get. Speaking of which, how does 200% APY sound? Join Phase 1 of our Bootstrapping period and find out!
Disclaimer: The information provided in this post is not legal, accounting, or financial advice. The information should not be construed as investment or trading advice and is not meant to be a solicitation or recommendation to buy, sell, or hold any cryptocurrencies.