Staking or liquidity mining? Understand the difference and then decide how to earn passive income

Many people who play cryptocurrency start out by buying low and selling high, and they get tired of watching the market. Later, you will gradually find that the coins in your hand are just left alone. Why not use them to "work" to earn some income? So there are two methods that are often compared together: staking and yield farming. Both of them allow you to get rewards without moving a position, but the logic behind them, the degree of worry you need to worry about, and the pitfalls you may step into are actually quite different.

Let’s talk about “passive investing” first. The so-called passive means that you don't need to keep an eye on the price every hour like trading, and you don't need to place orders frequently. Instead, you put the assets into a certain mechanism and let it generate returns on its own. In addition to staking and liquidity mining, lending is also common. The benefit is very intuitive: you can increase your position just by holding the assets, without having to make too many decisions and saving time. But being passive doesn’t mean there’s no risk. When the market really drops, you may not be able to react because you are not actively managing it; some products will lock your funds for a period of time, and you can't escape even if you want to; there are also strategies that focus on a few assets. Once there is a problem with these assets, your investment will suffer.

How does staking work? Simply put, you lend your coins to a blockchain that uses a proof-of-stake (PoS) mechanism to verify transactions and maintain network security. In return, you receive additional token rewards. Take the products on Binance as an example, including ETH Staking, SOL Staking, Soft Staking, etc. Some are flexible and can be taken out at any time; some are locked and need to be kept for a certain period of time. Among them, liquidity staking is worth mentioning: if you pledge ETH, you will get back a representative certificate, such as BETH; if you pledge SOL, you will get back BNSOL. This certificate is not locked like traditional staking. You can still use it to trade, transfer, or participate in other DeFi operations, while still receiving the original staking rewards. Soft Staking is even more worry-free. As long as you put the supported coins in the Binance spot wallet, the system will automatically distribute the income according to your average daily holdings. You do not need to lock the position, and it will not affect transactions and withdrawals.

Liquidity mining is another way of playing. It takes place in the DeFi world, with “liquidity pools” at its core. When you deposit assets into the pool, it is equivalent to lending funds to decentralized exchanges or lending protocols, such as Aave and Uniswap. Others rely on these funds to trade and lend. As a liquidity provider (LP), what you earn may be interest, fee sharing, or governance tokens given by the agreement. Sounds appealing, right? But there is a pitfall here that is not found in pledges, which is called "impermanent loss", also called "divergence loss". When the price ratio of the two assets you deposit changes, your total value may not be as good as sitting quietly in your wallet from the beginning. Losses are "impermanent," meaning they will disappear if prices rise back to their original proportions, but this is not guaranteed.

Speaking of comparison, the biggest difference between staking and liquidity mining is the purpose and complexity. Staking is helping the blockchain work, ensuring network security and smooth transaction verification, so the rewards are relatively stable, and the operation is basically "put it in and forget about it." Liquidity mining provides liquidity to DeFi applications so that other users can trade or borrow more conveniently. In order to pursue higher returns, you may need to repeatedly research different fund pools, move money around, or even use income aggregation tools. In terms of risk, staking is mainly afraid of falling currency prices or problems with verification nodes; liquidity mining has additional risks such as smart contract vulnerabilities, project team escapes, and unpredictable losses. So liquidity mining usually has the potential to give higher returns, but this comes in exchange for higher complexity and greater risk.

So how to choose? If you have just entered the circle and don’t want to bother, or you have been holding the native tokens of the first-layer network (such as ETH or SOL) for a long time, and want to support network security by the way, staking is a more suitable starting point. Although its rewards are not huge profits, they are worry-free and predictable. If you have been working in DeFi for a while, are familiar with smart contracts and various wallet operations, are willing to take higher risks to strive for better returns, and still have time to actively monitor positions and study various pools, then you can try liquidity mining. Newbies who start liquidity mining can easily suffer from impermanent losses and contract loopholes.

Reference: Binance Academy’s original article “Staking vs. Yield Farming: Which One Is Better?” link: https://academy.binance.com/en/articles/staking-vs-yield-farming-which-one-is-better. This article is a learning tutorial independently rewritten by CoinRebate based on the article. It is not official content of Binance, nor does it represent the views of Binance.

One final reminder: No matter which path you choose, do your own homework and only invest money you can afford to lose. If you want to be more secure, you can diversify your funds into different assets and consider using a hardware wallet to store your private keys. When selecting specific products, it is best to check the handling fees, withdrawal fees, lock-up rules, and reward distribution methods. Don’t just look at the advertised annualized income. After all, regardless of staking or liquidity mining, whether the rewards are worthwhile depends largely on whether the market price is stable. When prices fall all the way, no matter how high the annualized value is, you can't make up for it.

Transaction fees, VIP levels and rebate conditions may change, please refer to the exchange account page and CoinRebate's latest rate page. This article is for educational purposes only and does not constitute investment advice.