9.1.2025
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From crypto lending and staking to liquidity mining and yield farming, the DeFi market has opened up a world of opportunities for crypto investors looking to earn yield on their crypto assets.
But with all these available options, it’s not easy to choose the best fit, given the risk and return profiles.
Read on to learn more about the different options and what you can expect from each one.
The growing popularity of DeFi meant an equivalent need for liquidity. Borrowers needed assets available to borrow. Traders needed assets available—on both sides of each trading pair—to trade. Some blockchains need users to stake funds and validate transactions.
Since DeFi shouldn’t have a central authority that would provide the funds needed for financial activities such as trading and lending, this meant incentivizing users to provide their own currently unused funds to different liquidity pools. In return for their cooperation, these providers are rewarded by receiving interest or fees paid by users of these pools.
Nowadays, there are different ways of participating in the DeFi space to generate investment income, including lending, staking, liquidity mining, and yield farming. Let’s take a look at each one.
To earn money by lending, you need to provide a crypto asset that other users want to borrow You provide the asset by depositing it into a lending pool. In return, you receive interest according to the annual percentage yield (APY) shown. The APY is subject to change as the market shifts.
On the other side, borrowers who need the deposited asset will provide collateral. On Sovryn, loans are overcollateralized, meaning borrowers need to provide more collateral than the value of what they’re borrowing.
Lending also comes with its share of risks. For example, margin calls may occur. If the collateral value drops below the agreed-upon rate, this can trigger a margin call, so borrowers either have to deposit more collateral or risk liquidation. Additionally, with more borrower activity, the available funds in the pool may dry up, meaning lenders may not be able to withdraw their funds immediately.
Some blockchains use a proof-of-stake (PoS) consensus algorithm. Participants, also called stakers, will deposit some of their holdings in that blockchain’s native token in order to participate in confirming transactions, creating new blocks, and governing the chain. They will receive a percentage of fees in return.
The risks associated with staking depend directly on the chain in question: network issues could lock you out from your stake, and bad behavior (such as downtime or validating bad transactions) may be punished by slashing. But if you’re participating in a well-maintained blockchain with a good user base and you’re not working against it, the risks of losing your stake are much lower.
DeFi staking is another form of staking. This involves staking a DeFi platform’s governance token to earn rewards and participate in a protocol’s governance process, usually earning fees in the process.
Sovyrn, for example, has a token called SOV. Its purpose is to provide a mechanism for governing the Sovryn protocol. By staking SOV, users can earn rewards and participate in Bitocracy, the platform’s decentralized governance model.
Compared to other yield-generating activities, staking tends to generate a lower investment income, but it also entails fewer risks. Sovryn currently approximates their maximum staking APR to be around 7%.
Liquidity mining refers to the practice of locking up your crypto assets in liquidity pools used by decentralized exchanges (DEXs) to provide liquidity, which means enabling trades for other users. Users typically need to provide a 1:1 value ratio of the two assets, as defined by the pool, in order to keep it balanced. In return, they receive a percentage of the fees paid by the traders in that pool.
In terms of rewards, liquidity mining’s APR will depend on the need for that pool. Pools that are used more often and are not necessarily liquid enough to provide service may choose to raise their APR to attract more deposits, and vice versa. This means rewards are never fixed: the APR can drop significantly depending on the needs of the market.
Additionally, liquidity mining can entail a liquidity risk, meaning that users may not be able to withdraw their deposited funds quickly. Finally, unvetted pools can be based upon faulty smart contracts, which pose their own risk, be it susceptibility to hacks or simply bad programming that leads to the loss of funds.
Yield farming is not a fixed term in the DeFi space. Generally, however, yield farming describes a type of liquidity mining where users receive the protocol’s governance token in return, and then stake it, increasing their total investment income by adding different ways of generating it. However, the different approaches also compound the number of potential risks.
A drop in yield in one part of the equation can significantly reduce overall returns if you’re not constantly on top of your yield farming portfolio. This can sometimes require moving funds between different platforms, protocols, and pools. The process can a lot of technical knowledge, investment knowledge, time, and funds, which may not be a viable option for everyone.
For a more coherent overview, let’s take a look at the basic similarities and differences among these types of yield-generating activities.
Different yield strategies have different returns, but generally speaking, higher rewards tend to entail higher risks as well.
For staking, the lowest-risk strategy, Sovryn estimates a maximum APR of up to 7%. The Staking Rewards platform, on the other hand, states that you can earn an APR of 3.38% on Ethereum, going up to around 10% on Celestia (TIA).
However, higher returns are usually associated with lending and liquidity mining.
On Sovryn, lending can net you 11% APR on DLLR, up to 14% on DOC, and around 10% on XUSD. For liquidity mining, their DLLR/BTC pool goes up to 13.41% APR, while the next biggest, SOV/BTC, will net you up to 6.4%.
The highest rewards usually go hand in hand with the highest risks, so yield farming can generate high potential returns depending on the platform used and the assets deposited. However, this strategy should only be attempted by experienced traders as the potentially high yields tend to fluctuate significantly, and the riskiest platforms often offer the highest yields. Furthermore, yield farming may require tokens to be locked for an extended period before they’re available to the user, which could result in lower returns if the price falls during the lockup period.
However, the general rule stands for all levels of risk: don’t invest what you can’t afford to lose.
Connect your wallet to Sovyrn to start earning investment income in the DeFi market.
Crypto staking and lending can both generate investment income, but the final decision between the two depends on the investor’s profile and the platform they choose. If the investor is less experienced and would like to generate returns by locking up their funds for a fixed amount of time, staking is generally considered a lower-risk choice.
More experienced investors can potentially generate higher returns from lending, depending on the assets they supply to the lending pool. However, the platform's reliability should also be considered when deciding where to lend or stake.
Yield farming is sometimes used to encompass all the different strategies that investors use to generate returns from locking up their assets. Still, more specifically, it combines a number of different strategies. Staking means locking up a governance token to earn rewards and participating in the governance of a platform. Liquidity mining means providing assets to a liquidity pool and generating returns based on fees from pool users.
Crypto lending refers to depositing funds into a lending pool from which other users can borrow. Staking, on the other hand, is usually the basis for a chain’s consensus algorithm or DeFi platform’s decision-making process: it means locking up the funds in order to allow the smooth running of a blockchain or a DeFi platform. Lending can be done with any asset that is sought after by borrowers, while staking can only be done using a specific coin or governance token.
Depending on the user’s experience level, there are different answers to this. Staking is generally considered lower risk for new, inexperienced users, but farming typically generates higher returns as long as the users know what risks they’re facing. In the end, the most important principle is to do your own research and decide what strategy best suits your risk profile.
