In the blockchain network, such as those using the Proof of Stake or decentralized system, you will often hear the terms staking and liquidity pool. What is staking? What is a liquidity pool? Which one should you use in your crypto investment?
In this guide, you will learn about staking vs. liquidity pool. Read on.
Understanding Crypto Staking
Crypto staking is the process where you need to put your digital assets on lock for a certain period in the associated blockchain network. Staking is the system used by the Proof of Stake blockchain network to give the miners the chance to take part in the blockchain network activities.
By staking their cryptocurrency, miners can take part in block creation within the blockchain network, thus having more chances to earn rewards.
With staking, you will need to put some of your cryptocurrency assets on hold as an investment in the blockchain network. You cannot use the cryptocurrency assets unless you want to revoke your participation in the blockchain.
However, by staking, you can get an annual interest rate as provided by each blockchain network, and you can earn various rewards as a part of your participation in the network.
By staking, you will also contribute to the expansion and development of the blockchain network, which also means contributing to its cryptocurrency expansion.
Understanding Liquidity Pool
Liquidity pool is almost the same as staking, but with the liquidity pool, you will deposit your tokens to the decentralized blockchain network, so that other users can use it for various purposes.
Liquidity here means that you will make your digital assets accessible for other users in return for various rewards you can get. You will earn rewards when other users use your tokens for their purposes.
However, please note that in the liquidity pool setting, you need to form smart contracts with other users to determine the rewards you will earn from the use of your deposit in the blockchain network.
You will earn the rewards as determined by the smart contracts. So, you might earn different tokens as a reward for your participation in the liquidity pool. Remember, the liquidity pool system can lead to losses sometimes.
Benefits of Crypto Staking
In the Proof of Stake blockchain network, staking your cryptocurrency can give you various advantages. First, the Proof of stake has better energy efficiency, so it will be less costly for you to build the hardware to mine in the Proof of Stake blockchain network.
However, it requires the miners to stake their own assets in the network as the requirements for them to take part in the mining pool.
Here are the benefits of crypto staking:
- You will earn the annual token or crypto rewards from the digital assets you stake in the blockchain network.
- You can become the validator in the blockchain network, provided that you have reached the staking requirements in that network.
- The more digital assets you stake, the better your chance to create blocks in the network and earn rewards.
- You can earn rewards by various means, such as transaction fees and others.
- You can also reduce the transaction fees in the blockchain network if you have some crypto assets staked there.
Benefits of Liquidity Pool
Unlike crypto staking which puts your digital assets on hold in the blockchain network, a liquidity pool allows other users to use your deposited digital assets in the decentralized blockchain network. This can give a lot of opportunities for you to earn rewards in return for the use of your tokens in the liquidity pool.
You will need to create smart contracts with other users to determine the rewards you will get for the use of the tokens you have deposited in the pool.
Here are the benefits of liquidity pool:
- There are various potential rewards you can earn from your smart contracts with other users in the network.
- Also, you will get rewards from the blockchain network itself for depositing your tokens in the liquidity pool.
- Your digital asset value will get updated according to the current exchange rates.
- You can receive other tokens as rewards, so you don’t get locked in receiving the same token as the one you deposited on the network.
- You will also earn rewards from the transaction fees collection in the network.
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Conclusion – Staking vs. Liquidity Pool: Which is Better?
Between staking and the liquidity pool, there are benefits and disadvantages you will get when you choose any of them. You can’t say that one is better than the other, as it will depend on your needs.
Staking will allow you to invest in your digital assets and lock them in the blockchain network for block creation there. With staking, the more you stake, the more chance you will have to earn rewards from the blockchain network.
Also, staking allows you to become the validator of the network, meaning that you will have more authority there. You can also earn a steady amount of interest per year, depending on the blockchain network you take part in. Your digital assets will be secure in the blockchain network when you stake them.
Liquidity pool allows you to give other users access to your digital assets, so you will have more chances to earn rewards in the blockchain network.
You will need to form smart contracts with other users, depending on their needs toward your digital assets. You will also get the rewards after the users use your digital assets. With the liquidity pool, you are lending your digital assets to other users.
You can get various rewards from other users depending on the smart contracts you have made with them, and you can also get steady rewards from the blockchain network.
However, there is a possibility of failure when you fulfill your smart contracts with other users using the liquidity pool.
So, it’s up to you. You can use crypto staking or liquidity pool, or you can use both of them and diversify your investment. It all boils down to your preferences in how you want to invest your digital assets in the blockchain network.