Newbie Guide: Farms vs Pools — What is the difference and which is better for the average investor?
Proof Of Work vs Proof of Stake
Bitcoin mining started 12 years ago with running program on a computer to try to solve a puzzle before anyone else does. Solving this puzzle completes a block, and that leads to the creation of new bitcoins and updating the digital ledger to track all of bitcoin transactions. Over the years, with critics on environmental impacts and rising cost of mining, blockchain developers are finding new ways of providing passive income opportunities with a new protocol, Proof Of Stake(POS). With the new consensus mechanism, investors can stake their token to become a validator in the network, earning rewards based on the percentage of coins in the process.
Proof of Stake comes with a number of improvements to the Proof of Work system(BTC Network). With Proof Of Stake, it reduces the impact on our environment by providing better efficiency and lowers the barriers to entry, eliminating hardware and technical knowledge.
Booming of DeFi
By 2020, yield farming has gain its popularity with the boom of DeFi and all its exciting features. Yield farming, also known as liquidity mining belongs to Proof of Stake Protocol. However, when you compare them side-by-side, staking usually involves a more considerable amount of tokens to boost the chances of being selected as the next block validator.
In contrast, yield farmers can move their assets actively from time-to-time to earn new tokens. Providing liquidity to DeFi is multiple times more profitable compared to staking, and this has made many investors moving from staking to liquidity farming given its high annual percentage yield(APY) and flexibility.
Investing In Farms
With Yield Farms, investors would be required to stake two tokens in the liquidity pool to get LP tokens, which is then staked into the Farms to earn rewards. In MixSwap, MXS tokens will be rewarded.
Investing In Pools
Unlike Farms, investor will only be required to stake one token in the Pool to start earning their rewards(MXS). Staking in Pools is the simplest way to earn free rewards in MixSwap. Just stake MXS, earn free MXS. It’s really that easy and anyone can do it.
However, do note that providing in Yield Farms can give you better rewards than Pools, but it comes with a risk of impermanent Loss. It’s not as scary as it sounds but you should understand it before getting started in yield farming.
To understand more about impermanent loss, you can check out this awesome article from Binance
Summary
Now that you have known more about yield farms and pools, they have both their advantages and disadvantage. With one giving higher returns of APY while the other being of lesser risk. Do check out our multiplier table below for comparison.
Choosing between Yield Farms and Pools can be difficult. Your appetite for risk could be your determine factor on which is your favourite choice. But don’t worry, you will be able to change your decision anytime given its flexibility.
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