In the cryptosphere, these terms often get used interchangeably which can be confusing for people new to the space. As a general rule of thumb, staking tokens on a protocol means earning yield by depositing and lending out your tokens to the public, while staking when referring to a layer 1 Proof of Stake blockchain (such as Cardano) refers to earning yield by delegating to stake pool operators to increase the likelihood of block production.
What is staking (on PoS blockchains)?
Staking is a critical function in proof-of-stake (PoS) protocols like Cardano. Simply put, it’s a way to put your tokens to work on behalf of the protocol; and because it’s such an important function, you are rewarded for it. Cardano uses staking to validate transactions, letting participants earn ADA rewards for their ADA that is staked.
Minting blocks on Cardano involves running a node, which can be complicated. Because of this, Cardano supports the creation of stake pools, which are run by stake pool operators who know the ins and outs of operating a validator node. These nodes earn ADA for their validation work. Stakepool operators (SPOs) can increase the likelihood that their pools mint a block by encouraging ADA holders to “delegate” their ADA to their pool.
While the “staked” ADA put up by the SPO is locked up by the protocol, ADA “delegated” by an individual to an SPO is fully controlled by the individual (the “delegator”). When blocks are minted, ADA rewards are split between the SPO and delegators for their contribution to securing the network. This is an easy and relatively safe way to earn rewards for delegators.
What is yield farming?
Staking isn’t limited to the blockchain itself. Protocols running on a blockchain can implement similar staking systems and rewards. Many protocols, for example, use a form of staking to enhance the stability of its liquidity pools by implementing a form of staking called yield farming.
In Yield Farming, liquidity providers have the option to stake their LP tokens, which represent their share of the Liquidity Pool, for an extended period of time. In exchange for taking that risk, Liquidity Providers who have locked their LP tokens in a Farm for an extended period of time are rewarded with the protocol's native utility and governance token.