The process of earning new cryptocurrency tokens has evolved throughout the various developments within the cryptocurrency space.
Suppose you’ve been interested in the field of cryptocurrencies. In that case, the chances are high that you have come across the 2 main ways of gaining cryptocurrency.
One is mining, as seen the most on cryptocurrency blockchains such as Bitcoin’s. The other is farming or yield farming, something that is typically done on platforms such as Uniswap, Aave, PancakeSwap, Curve Finance, and Yearn.Finance.
Mining vs. Farming: What Are The Differences?
To get a better perspective of how each of these works, we’ll be taking a deep dive into each one of them, so you can learn everything you need to know before going to one route.
Mining is how new cryptocurrency tokens, typically the ones native to the blockchain in question, are added into circulation. Furthermore, mining serves as a maintenance and development component of the ledger itself.
For it to be performed, computers need to contribute processing power and solve complex cryptographic puzzles.
This makes cryptocurrency mining difficult, expensive, and only rewarding if you have the raw hardware to invest in the process of verifying the transactions.
It is appealing for investors that are interested in cryptocurrencies due to the fact that a miner is rewarded for this work in the native cryptocurrency token.
In other words, by mining, you can earn cryptocurrency without putting down money to actually buy it. You receive a reward for completing and verifying blocks of transaction data, which are then added to the blocks before it, forming a chain.
Mining rewards are paid out to the miner who discovers the solution to the cryptographic puzzle first, and you require high-end hardware to set up a mining machine, to begin with.
Farming, otherwise referred to as yield farming, is an alternative method through which investors can earn cryptocurrencies.
It allows the holders of a specific cryptocurrency asset to earn rewards on their holdings.
To engage in the process of farming, here’s what you need to do:
First get your hands on some cryptocurrency, this can be any cryptocurrency that is compatible with the lending protocol you end up using.
Once you have purchased, or gotten that cryptocurrency through some other way, you can deposit it into the lending protocol that we previously mentioned.
Here, you can earn interest from the fees that occur each time the cryptocurrency you just put into the protocol gets lended, and paid back over time.
This will earn you yield, as well as an alternative reward from the protocol’s native token.
Once you acquire this specific token, you can either get a reduction on the fees on the protocol itself, or re-deposit it into another pool, where it can earn you even more yield.
You can think of this along the lines of a bank loan. When the bank loans someone money, they pack back the loan with interest. Yield farming does this same process; however, any user can be the bank, with the pool being the total sum of cryptocurrency that can be lent out.
On the back-end side of things, yield farming works with a liquidity protocol and a liquidity pool. You can think of this as a smart contract that gets filled with cryptocurrencies. This powers the decentralized finance (DeFi) market.
An automated market maker model (AMM) is one that eliminates any conventional order books.
This, in-turn, creates a liquidity pool with smart contracts. Given the fact that it is smart-contract based, all of the trades occur automatically, once specific, pre-programmed conditions are met, the ones specified in the smart contracts.
Most of the time, you will notice that you will receive an estimation on how much you can earn in terms of yield. This yield is estimated based on an annual basis.
In other words, yield farming protocols give an incentive to liquidity providers (LP) to stake or lock up their cryptocurrency assets in the smart contract-based liquidity pools.
In fact, when users add their assets NBXB and WBNB (BNB) into a BSC-based liquidity pool, they can receive BEP-20 Liquidity Provider (LP) tokens proportional to their contribution within that pool.
They can receive fees paid by liquidity stakers, and they can be redeemed for their share in the underlying assets of the pool. These LP tokens give you the opportunity to stake them in special pools to farm NBXB tokens.
The Green Winner
So, on the one end of the spectrum, you have mining. Mining involves the purchase of expensive hardware that uses precious materials to make and involves a lot of electricity use.
Not only this, but it also generates significant quantities of electronic waste (e-waste), and the reason for this is due to the fact that mining is done with hardware that becomes obsolete every year or two. This means that the hardware has to be sold or thrown away, and new hardware needs to be bought.
On the other end, you have what is known as farming. Farming literally lets anyone just use their pre-existing cryptocurrencies, or if they do not have any, cryptocurrencies that can be bought at many exchanges using FIAT currencies put these tokens into a liquidity pool that is smart contract-based and generates returns for them.
This is all done automatically, as smart contracts are pre-programmed and require no middle man or central authority to check everything, and as such, it is a much greener solution when it comes to earning more cryptocurrencies.
In other words, mining isn’t a green solution, and it is far from green. It generates a lot of e-waste and uses up a lot of electricity, while farming is a much greener solution that wins when it comes to the way in which you can earn new cryptocurrency tokens.
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