When DeFi first emerged, the terms Staking, Yield Farming, and Liquidity Mining quickly followed a wave of frenzy.
They have many things in common, and sometimes they can even be used interchangeably, which leads to many people, seeing these words is still the monk Zhang Er?
After hearing about all kinds of crazy mining income and farming income, you must also really want to understand what these terms mean and how to obtain income.
This article will carefully analyze the basic definitions of these concepts and the key differences between them.
Staking (Pledge of Rights and Interests)
Staking is the most widely used of the three concepts mentioned in this article. Unlike the other two terms that mean liquid mining, Staking has many non-cryptographic definitions, which can help clarify the nature of behaviors such as collateralizing assets in encrypted networks.
To cite a relatively simple example, we often mention the word “push”. The first interpretation of Baidu’s Chinese is to give the property to the other party as a guarantee. This means that people put something important to support other things they believe in. The stakeholders of this behavior can be anyone.
In the crypto world, staking also refers to the act of providing collateral as a proof of one party’s status in the project. This also means the sincerity of the stakeholders of the agreement, and the stakeholders have shown their trust in their support of the agreement through mortgage behavior.
There are already many ways to support various encryption and DeFi protocols. Ethernet Square 2.0 has been successfully proven mechanisms of transition from work (PoW) to demonstrate interest in the mechanism (PoS).
Since then, the verifier does not need to provide a hash for the network, but only needs to pledge 32 ETH , which can be used to verify transactions on the Ethereum network and obtain block rewards.
Other revenue models, such as- Polkadot and other networks allow DOT holders to pledge their tokens and nominate validator nodes in their nominated proof-of-stake (NPoS) consensus mechanism, thereby obtaining an annual rate of return (APY) in return. Other agreements require mortgage tokens so that users can participate in governance decisions and vote.
Centralized platforms such as Coinbase, Nexo, and BlockFi also allow users to pledge their digital assets.
These platforms work in a similar way to banks-get Xiaohong’s deposits and then lend them to Xiaoming in the form of credit. Xiaohong and the bank get the interest paid by Xiaoming.
For potential stakeholders, a question needs to be clarified, that is, why do tokens need to be mortgaged?
Among these agreements, some agreements essentially require pledges to prove the status of users in the project or enable important financial functions, while some agreements only use pledges as a way of circulating supply to increase the price of tokens.
Taking CertiK’s decentralized asset protection program CertiKShield as an example, users who hold CTK can obtain up to 30% of APY by providing liquidity to the mortgage pool. The economic function of these mortgaged CTKs is very important: to provide insurance for encrypted assets that cannot be recovered due to theft and other reasons on the blockchain network.
The function of the CertiKShield model is different from other proof-of-stake applications (such as PoS or centralized credit proof). It combines the openness and security of DeFi to realize a new encryption field: decentralized on-chain insurance, which can be compensated Encrypted assets that cannot be recovered due to theft and other reasons on the blockchain network. Users and stakeholders who hold CTK can assist the operation of the platform through mortgage behavior, and obtain benefits and rewards for the value it provides.
Although Yield Farming (yield farming) and Staking (staking of equity) have many similarities, Yield Farming is a more novel concept than Staking.
As mentioned above, staking can refer to behaviors such as locking 32 ETH to become an Ethereum 2.0 verification node, while Yield Farming specifically refers to the behavior of providing liquidity for the DeFi protocol in exchange for revenue.
The term “Farmer” is better understood, which refers to the group of people who are active in major DeFi agreements seeking the highest returns for their assets.
One example of Yield Farming is to provide liquidity to the automated market maker (AMM) pool like Uniswap. The liquidity provider (LP) deposits two tokens: token A and token B. Token B is usually a stable currency such as USDC or DAI or ETH. The fees paid by users of the pool when trading tokens will be given to these liquidity providers in return.
This income is calculated according to the percentage of its deposits in the total fund pool. That is, if the value of your deposit reaches 1% of the entire fund pool, then 1% of the total payment income of the entire pool is yours.
But getting high income in Double-sided Liquidity Pools will face a risk-impermanent loss.
Take the ETH/DAI mining pool as an example. DAI is a stable currency, but ETH is not. Therefore, as ETH appreciates, AMM will adjust the ratio of depositors’ two assets to ensure that the value of both remains unchanged. This may cause impermanent losses: as ETH appreciates, the amount of ETH equal to the initial DAI deposit value will decrease, thus causing a disconnect between the value and the amount of tokens deposited.
If you withdraw the deposit at this time, the loss that is inherently non-permanent will become permanent. However, if your impermanence losses have exceeded your gains, it is better to withdraw your tokens.
There are AMMs such as Bancor in the market that provide unilateral deposit services to reduce this impermanent loss. Some other income farming and interest-bearing products, including CertiKShield, have been designed to avoid this risk.
Yield Farming may bring very large benefits in the early stages of the project, after all, you are holding “large original shares” at this time. However, the encryption field has never lacked inherent volatility and the development of various new financial products, which is also one of the multiple risks you need to consider.
Liquidity Mining (liquidity mining)
Liquidity Mining can actually be regarded as a subset of Yield Farming.
The main difference between them is that Liquidity providers can not only get income like Yield Farming, but also get the platform’s own tokens. For liquidity providers, this additional income can offset all or part of the impermanent loss.
For example, Compound, this project uses its governance token COMP to reward users, and it is the first person to introduce such an incentive plan. COMP tokens flow not only to liquidity providers, but also to debtors. This means that all Compound users can get benefits and can participate in the governance of the agreement.
This subverts the traditional financial model.
But some other liquidity mining schemes only provide income to liquidity providers (LP). Usually liquidity providers can mortgage tokens in the pool-so they can not only get the original token mortgage reward, but also the income generated by the partial mortgage of the reward token.
Although liquidity mining may have the problem of “inflation” due to dilution of currency holders, it often has months to years to regulate the agreement, so in short, it is still a way to introduce liquidity into the DeFi platform Way to success.
Written at the end
The three concepts mentioned in this article are all ways to invest in digital assets. Through the above introduction, I believe that everyone has an understanding of equity pledge, income farming and liquidity mining.
As a DeFi user, you can choose any way to gain income and increase assets. But at the same time, you should first ensure that the platform has passed a complete security audit and has methods and measures to ensure security, fully consider the potential risks of these behaviors, and understand the ways and principles of the behaviors that generate benefits.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/what-is-the-difference-between-equity-pledge-income-farming-and-liquidity-mining/
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