Staking and liquidity providing are common methods of passive income strategy in the cryptocurrency industry. In this article let’s talk how they differ, what are their pros and cons and what is better to choose. 

In the beginning, let’s briefly recall what is liquidity mining. We talked about it in our previous article here. Liquidity mining is a reward program with its own protocol tokens in exchange for the providing of capital. Sometimes it also called lending. In this case, you provide assets to the protocol that other can use, and in return, you receive protocol tokens. The income will come from lending, which means from other users who will borrow assets. Liquidity providing is kind of similar but still not the same. 

Liquidity providing 

Liquidity providing is the provision of a pair of tokens to the liquidity pool. Anyone can become a liquidity provider (LP) by giving two assets in equal shares of value to the pool. LP’s income will be the protocol fees, which are divided into all liquidity providers. This is working on AMM (automatic market-making). Liquidity providing is an activity that involves high risks. They include: 

· Risk of impermanent loss. The probability of a drop in the value (price) of your funds, while you keep them in the pool (in AMM), not just in your wallet. 

· Risk of price slippage. When the price of the token changes in the period between its placement and execution. 

· Risk of hacker attack. If an exploit is detected in the protocol, hackers can attack the smart contract and withdraw all user funds from there. 

· Risk of bumping into a scam project. Scam projects can change smart contracts and steal your funds after gaining a certain number of tokens in the liquidity pool. 

As you can see, there are some risks. So, carefully study the platform on which you are going to operate, study the tokens and the projects behind them. 

The advantages of liquidity providing are: 

· Decentralization. Anyone can become an LP. 

· High profit. 

Staking 

Staking is a process of participating in the verification of transactions in the Proof-of-Stake blockchain. Delegators stake their tokens to validators who verify transactions on the network. Also, staking is a long–term strategy for getting passive income from crypto. You can hold tokens for as long as you want or as far as it fits your financial strategy. 

We see many advantages of staking: 

· Your tokens always belong to you. 

· Staking is important for all participants: you get passive income, the project becomes more secure and decentralized, and the token itself is strengthened. 

· It’s not complicated and do not require special skills or knowledge. In most cases you just need your wallet to stake tokens and claim rewards. 

However, there are also some disadvantages: 

· If you keep your tokens in staking, they are blocked. It’s like renting, validators rent your tokens and pay you for using them, which is your reward. Rewards depend on the specific cryptocurrency and validator. 

· Just like in the liquidity providing, you need to be careful in choosing token and validator. Give preference only to those validators who fulfill their responsibilities to the network. If you have chosen a new project or a new validator, check their social networks, website, and technical documents before delegating tokens. 

· Never forget about high volatility of the cryptocurrency. The price of the token may fall while it’s in staking. 

Remember to pay attention to the APR. APR is the annual expected percentage that you will earn by staking on a certain amount of tokens. 

Also, there is the validator’s commission. Mostly, they are minimal. Let’s give an example of calculating profitability. REGEN network inflation is 29% per annum and a Making cash validator’s commission is 5%. If you stake 100 REGEN tokens to Making Cash validator, you will receive 29 REGEN tokens, of which 1.45 coins you will have to give to the validato (this is his 5%). 

Conclusion 

Staking and liquidity providing are two ways to earn money in DeFi. In our opinion, staking is a less risky, simple way that is suitable for long-term investment strategies. Liquidity providing is more complicated and requires careful study and has more risks. But which one to choose it’s up to you, just always remember to carefully study projects and tokens. And never invest more than you are willing to lose!