In the digital investment universe, two popular options are Liquidity Pools and Staking. Both allow you to generate income, but they have different characteristics that impact the investor's choice. Do you know the difference between them?

According to the specialist and CEO of Futokens, Matheus Medeiros, knowledge is needed to ensure profitability safely.

“These are two investment strategies that, like the others, have their risks, so it is important, in addition to knowing them well, to have a specialized professional to help.”

Liquidity Pools

Liquidity pools function as “vaults” where users deposit cryptocurrencies to facilitate trading on decentralized exchanges (DEXs). In return, they receive stake tokens (LP tokens), which guarantee a share of the transaction fees. This model offers constant liquidity, but exposes the investor to the risk of impermanent loss – losses related to the volatility of the assets.

Medeiros explains that Impermanent Loos is linked directly to liquidity and occurs when asset price volatility impacts the total value that a liquidity provider (LP) could have by holding assets instead of providing liquidity. 

Staking

In staking, assets are locked up to support the operation and security of a blockchain network. In return, investors receive periodic rewards, such as new cryptocurrencies. With stable returns and annual rates that can exceed 20%, staking is ideal for those looking for a passive and secure strategy.

However, liquidity is limited as funds remain locked for a specific period.

Risks and considerations

Both options have risks, such as volatility and liquidity issues. This choice depends on the investor’s profile and goals. Liquidity pools may appeal to those who prefer quick access to capital, while staking is more suitable for those seeking predictable returns and stability.

Diversifying between Liquidity Pools and Staking can be an efficient strategy, depending on the market scenario and financial goals. However, it is essential to assess the risks and perform a careful analysis before investing.

Both paths have their advantages and disadvantages, and it is not possible to determine which is best without knowing the investor's objectives and risk tolerance. If the investor is looking for a stable return and is willing to keep their assets locked up for a while, that is, to have a passive income and nothing more, staking may be the best option. However, if there is a preference for faster access to their capital, understanding the risks of impermanent loss, liquidity pools may be more attractive, explains Medeiros.

For beginners, staking is a simpler and more accessible option, as it does not require the execution of validator nodes. Many platforms offer delegated staking, allowing participation with small amounts. In addition, staking is less complex compared to Liquidity Pools, which involve the risk of impermanent loss and require greater familiarity with liquidity and security.

The article Liquidity Pools or Staking – expert explains differences was first seen on BeInCrypto Brasil.