Yield Farming

What Is Yield Farming?

What is crypto yield farming? Crypto yield farming or Yield farming is putting digital assets to work at the most optimized platforms, often to earn passive income in free digital assets.

What is Yield Farming?

Yield farming is a way to earn more crypto for holders with digital assets and open for exciting implementations run using smart contracts.

It is a process of participating in more exciting service offerings, including lending funds to others without third parties using smart contracts. In return for your service, which could be liquidity providing, borrowing, lending, or staking, you earn a certain percentage from fees in the form of crypto.

To make it more straightforward, “yield” is what you get for investing in yield farming. Meanwhile, “farming” is the possible exponential growth you can receive by finding the right place to invest in.

Yield farmers, when trying to earn through yield farming, use different complicated strategies and get to be very secretive about their yield farming strategies. Why? Good question. When a strategy is popular, it often tends to become ineffective.

Yield farmers mostly move their digital assets, often tokens, from one DeFi platform to another to maximize their yield returns. Yield farmers calculate their returns by the annual percentage yield (APY) because APY considers compounding.

Yield Farming, of course, isn’t without risks. There are risks of price volatility and rug pulls when using yield farming. And also, just like other DeFi protocols, they can be at risk of being prone to smart contract bugs or hacks, making funds vulnerable to attackers. Therefore, it’s advisable and vital to enact extensive proper diligence when wanting to get involved in the DeFi world.

Yield farming can involve lending digital assets to others, locking up the crypto in a liquidity pool, or some DeFi protocols like decentralized applications (dApps) – examples of dApps are Decentralized Exchanges (DEXs), Crypto wallets, etc.

How To Earn With Yield Farming

Staking

There are two modes of staking in the DeFi world. We have proof-of-stake (PoS), whereby a user gets paid interest to stake their cryptocurrency to the network to make it more secure. The second mode is the act of staking Liquidity pool tokens earned from supplying a decentralized exchange with liquidity. They can also stake to earn more yield as they get paid for providing liquidity in the LP tokens.

Liquidity Provider

This is the act of depositing two different types of coins to a DEX to provide liquidity for trading. Depending on the network, these exchanges charge a small fee to swap those coins or tokens, which will then be paid to liquidity providers.

Borrowing

Yield farmers can use one coin or token as collateral and receive a loan with another, making them farm yield with the borrowed coins or tokens. In doing so, they keep their initial holding, which could appreciate over time, while also earning interest on their borrowed coins or tokens.

Lending

Holders of a coin or token can lend their coin or token to borrowers with smart contracts and earn a yield from interest paid on the loan.

Popular Yield Farming Protocols

Uniswap

Uniswap is one of the top yield farming protocols. It is a decentralized exchange built on the Ethereum network. It enables users to leverage its liquidity pools to earn greater interest on the crypto holdings and to swap between thousands of ERC-20 tokens. For every swap on this exchange, the liquidity providers make a percentage or portion of the trading fees.

PancakeSwap

PancakeSwap, launched in 2020 and built on the Binance Smart Chain (BSC), is also one of the top yield farming protocols today. This protocol has evolved well over the past years and currently has a trading volume of over $100M. PancakeSwap enables its users to farm by providing liquidity. And in return, the users get Liquidity Pool tokens that are convertible into CAKE, the platform native token, or other cryptocurrencies. 

Curve Finance

Curve Finance is also one of the top yield farming protocols according to TVL (total value locked). Curve Finance was specially designed to ensure efficient crypto trading and offer high annual interest returns. Compared to other DeFi platforms, Curve Finance has its market-making algorithm and makes maximum use of lock funds.

Aave

Aave is also an Ethereum-based decentralized platform and a popular open-source liquidity protocol that enables users to lend and borrow cryptocurrency. Aave is one of the top and most used yield farming platforms. Its native token is AAVE. The token allows users to utilize the platform by providing fee discounts, voting power for governance, and various other benefits. 

Josh Fernandez

Josh Fernandez

20-something Non-giver of ETH.

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