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Staking & Liquidity Pools are two of the best ways to earn passive income with cryptocurrency in 2023. Both Staking and Liquidity Pools require some technical know-how to operate. People often confuse them with lending solutions, offered by exchanges, but in reality, there is no similarity between Staking or Liquidity Pool and lending.

Lending is the same concept in crypto as it is in the traditional financial system. The funds are deposited in exchanges and are lent out to people by exchanges for a specific period of time and interest is accrued in the process. Profit in lending is made via interest collected in the process.

Where as in Staking and Liquidity Pool, the funds provided are either used for strengthening the network and handling transaction on the blockchain or to provide liquidity for DeFi exchanges. No interest is involved in the process and profit is generated by the fees collected for verifying transaction on the network or by charging a small percent fee while swapping crypto assets.

What is Staking?

In Staking, the crypto assets are locked to help strengthen the network and support operations on blockchain. Fees are collected from the transaction performed on the network and are distributed based on the amount of crypto assets locked. Normally, the longer the duration of assets being locked, the higher percentage of fees is earned. There are certain risks associated with Staking that are discussed in detail here.

What are Liquidity Pools?

Liquidity Pools are a way to provide liquidity to decentralized exchanges. Crypto assets are clubbed together in a smart contract creating Liquidity Provider Tokens (LPT). These tokens are then deposited in liquidity pools. In decentralized exchanges there is no order book and to trade crypto assets the transaction has to be made via Liquidity Pools. Each transaction incurs a small fee and based on percentage of LPT, the fees are dispersed. Investment in Liquidity Pools can lead to impermanent loss, discussed in detail here.

Key Takeaway Points

1. In Staking and Liquidity Pools, profit is generated in forms of fees collected rather than interest.

2. Staking deals with the operation on the blockchain, where as Liquidity Pools are used to provide liquidity to decentralized exchanges.

3. Both are a good way to earn passive income in crypto but like any other investment carries risks. DYOR.

Conclusion:

Staking and Liquidity Pools can be a good way to diversify your crypto portfolio. Before investing, do comprehensive research that how things work and the risks associated. Investing in both will require you to have technical know-how of crypto, DeFi & decentralized exchanges.

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