Staking, farming and lending: ways to earn passive income in crypto

Interest in passive income in cryptocurrency is growing along with the market, although many people already understand there is no such thing as easy money here. Any passive income in crypto appears only when you put your assets to work for the network or pass them on to other participants in the ecosystem, and this choice is always associated with risk.

In this article you will learn:

• which of the best passive income methods investors use today and how staking, farming, and lending differ
• how the basic mechanics of each method are structured and what drives the yield
• what risks each approach carries and who it suits best

In the end, you will see how these tools turn into real strategies, understand where there is genuine earning potential, and where the most unpleasant traps for beginners tend to hide.

Cryptocurrency staking works in a very straightforward way: you lock your coins in a Proof-of-Stake network, the network uses your capital as a security element and pays out rewards. If we explain cryptocurrency staking what it is in one sentence, you provide your coins for the network to work with and receive new coins in return while keeping control over your assets.

PoS replaced mining thanks to a simple logic. In PoW you need to spend electricity and hardware, whereas in PoS a validator’s chance to receive a reward depends on the size of their stake. Attempting to attack such a network requires owning a huge amount of coins and being ready to lose them in case of slashing, so the economic incentive to attack simply disappears.

Before you start cryptocurrency staking and evaluate staking crypto profitability, it’s important to understand the difference between APR and APY:

• APR shows the annual rate without reinvestment; with an investment of $100 at 10% you can expect about $110.
• APY reflects the effect of compound interest, and with the same nominal rate the final amount ends up higher thanks to regular compounding.

A platform may show an impressive APY, although the real result still depends on how often you reinvest your rewards.

When it comes time to decide where to stake cryptocurrency, people usually consider three options:

1. CEXs like Binance or Bybit offer an Earn section where everything is done quickly and with a low entry threshold.
   Pros: simplicity and accessibility
   Cons: custodial risks and dependence on the exchange’s stability
2. Wallets like Trust Wallet or Keplr allow you to delegate coins to validators without giving up your private keys.
   Pros: the asset stays with you, and the process is transparent
   Cons: you need to understand validators and take slashing probability into account.
3. DeFi and liquid staking via Lido and similar solutions let you receive, for example, stETH and use it in other protocols.
   Pros: the asset simultaneously participates in staking and works in DeFi.
   Cons: smart contract risks and possible temporary discount on the token.

Each format fits different goals and experience levels, so it’s better to choose based on how ready you are to dive into protocol mechanics and accept a certain level of risk.

Farming crypto in simple terms always starts with one idea: you provide a pair of tokens into a liquidity pool on a DEX, and the network rewards you with fees and bonus tokens. Essentially, you help traders execute swaps, and the protocol shares a part of the volume with you.

DEXs like Uniswap do not use a classic order book. Liquidity is stored in pools like ETH/USDC, and the price is calculated by an AMM algorithm. To provide liquidity, you must deposit both assets in equal value. For example, if you want to add $1000, you deposit $500 in ETH and $500 in USDC.

For this contribution you receive LP tokens, which act as a “receipt” for your share in the pool. As long as you hold LP tokens, you receive a portion of the fees generated by trading. Some protocols allow you to send these LP tokens into an additional contract, where you also start receiving the platform’s own tokens such as CAKE or UNI. You could say that yield farming explanation boils down to one principle: LP tokens sit in the farm and bring you new tokens.

Thus, farming combines fees and platform rewards, and the final return depends on the pool’s volume and the strength of incentives. The higher the trading activity, the more opportunities to earn, but risks grow along with the yield.

To understand how farming works in practice, imagine the following:

• you add liquidity to an ETH/USDC pool on Uniswap or PancakeSwap
• you receive LP tokens and send them to a farm, where platform tokens start accruing
• your profit is formed from swap fees and the value of new tokens

At the same time, it’s always important to remember impermanent loss and the fact that the reward token can sharply drop in price. These details determine how profitable the strategy will be in the end.

Crypto lending works more simply than farming. You provide a single asset as a loan at interest and become a lender instead of a liquidity provider. This makes the process more predictable because you don’t have to maintain a balance between two tokens.

When it comes to how lending on CEX works, it all comes down to platforms like Binance Earn or Nexo taking your coins and passing them on to traders or institutional clients. The user sees a fixed or floating rate and earns as long as the platform operates properly. The main risk is tied to the platform itself, since stories like Celsius or BlockFi show that problems at the company level can completely wipe out even the most stable deposits.

Lending on DeFi platforms looks different. You deposit an asset into a smart contract, and it goes into a shared pool from which borrowers take funds against collateral. Over-collateralization is usually required, so the model remains sustainable as long as the market is not excessively volatile. Income is generated by the demand for loans and the specific protocol’s parameters. This scheme describes lending DeFi more accurately. There are no intermediaries here, but there are risks of bugs in the code, economic design flaws, and an overall dependence on the quality of the chosen crypto lending platform.

To see how this works in practice, consider a simple example:

• a borrower needs $1000 USDC
• they deposit $1500 in ETH as collateral
• if the price of ETH drops sharply, the protocol liquidates the position, sells the collateral, and returns the lender’s principal plus interest

This system is designed to protect liquidity providers, but the borrower risks losing part of the collateral if the market moves unfavorably.

Yield in crypto never exists in isolation and always goes hand in hand with risk. The higher the APY, the more hidden nuances there are, so it’s important to compare not only the numbers but also the mechanism behind them. This is especially noticeable if you look at staking vs farming and lending as three basic DeFi passive income tools.

For beginners, the easiest way to start is staking on major platforms and cautious lending of stablecoins. Farming is usually chosen later, when there is enough experience and understanding of how farming works and what risks it carries.

Impermanent loss, in simple terms, is a situation where your position in a liquidity pool earns you less than simply holding the same coins. This effect arises from pool rebalancing, and the easiest way to grasp it is with an example.

Imagine you deposit 1 ETH at $3000 and 3000 USDC, i.e. a total value of $6000. If the price of ETH rises to $6000, the pool automatically redistributes the assets, and part of your ETH “goes” to traders, while you receive more USDC in return. As a result, your share might be worth around $8484, whereas with regular holding you would have $9000. This difference is the impermanent loss, and it can only be offset by fees and farming returns.

Beyond IL, there is the frequent issue of the reward token’s price dropping. High APYs are often based on aggressive emissions, and if the token you are paid in loses 90–99% of its value, the return is sharply devalued. That’s why it’s important to evaluate liquidity and real demand for such tokens.

Another risk factor is protocol hacks. Even large platforms encounter exploits, and DeFi risks include not only code bugs but also oracle manipulations or incorrect liquidation parameters. Audits help, but they do not completely eliminate the possibility of an attack.

There are also centralized threats. CEX platforms can face freezes, technical failures, and bankruptcies, and in such situations your access to passive crypto income can be lost easily, even if on paper everything looked reliable.

When you choose a platform, it’s helpful to look at audits, reputation, and TVL, because these parameters immediately indicate the level of trust in the project. It’s better to check a few things:

• whether the protocol has an audit from well-known companies like CertiK and whether a bug bounty is in place
• what the TVL is and how it has changed over time
• how many years the project has been running and whether it has survived volatile market phases

Usually, the older and bigger the system, the higher the chance that the main vulnerabilities have already been fixed.

It’s just as important to understand yield transparency and stablecoin specifics. You should understand where the interest comes from, whether it’s fees, lending, arbitrage, or simple token emissions, which rarely provide stable profits. Passive income strategies on stablecoins — such as lending USDC or farming USDC/USDT — reduce volatility risk, although they still depend on contract quality and platform health. This approach works well as a base option for those who prefer a more conservative path without extreme APYs.

A conservative investor or classic HODLer usually doesn’t have enough time for complex strategies, and their risk tolerance is low. Such an investor chooses major coins and stablecoins and prefers low-stress instruments. In this case, staking on large CEXs or via official wallets works well, as does lending stablecoins in battle-tested protocols.

A moderate explorer is willing to dive deeper. They read documentation, test strategies with small amounts, and aim for higher yields without crossing into outright degen risk. Lending in DeFi on platforms like Aave, liquid staking via Lido, and farming stable pairs or large caps with moderate APY are suitable for this profile.

An active Degen operates differently. This is someone with a high risk appetite, ready to spend time on constant monitoring and to react quickly. This profile chooses farming volatile pairs, participating in new protocols with very high APY, and using complex leveraged strategies. These instruments can indeed deliver high returns, but the risk of capital loss is also highest.

Passive income in crypto is always associated with varying levels of risk, because you either support network security, lend out your assets, or provide liquidity to other users.

Staking, farming, and lending differ in complexity and potential returns, but the core principle remains the same: the higher the rates, the more attention you must pay to analyzing the conditions and mechanics of the protocol.

It’s better not to concentrate all your capital in a single instrument. Divide it between several directions, evaluate platform reputations, and start with simple solutions, gradually moving on to more complex strategies as you gain experience and confidence.