Yield farming, also popularly known as yield or mobility harvesting, involves cryptocurrency lending. Read more about how to earn tokens in our review.
Also read: The Future of Finance: Why Decentralized Finance is Here to Stay.
What is Yield Farming in Crypto and How Does it Work?
If you wish to learn what is yield farming in crypto, you need to understand what is decentralized finance, or DeFi. DeFi excludes any potential third parties in a financial transaction, meaning that the transaction goes only via the buyer and the seller.
Yield farming uses the entire process of DeFi in order to maximize returns on investments. Since there is no control over money by the banks or institutions, the users can maximize their profits that way. What yield farmers do is lend/stake their cryptocurrency in order to get rewards – lower transaction fees and/or interest.
Understanding How Yield Farming Works
Yield farming is a form of a crypto farm that allows the users to earn yield in the form of interest (paid in cryptocurrency or lower transaction fees). This can be really beneficial, especially if you wish to trade crypto later on for a much lower fee.
Types of Yield Farming
There are several types of yield farming you should learn more about and they are:
- Staking. If you pledge your tokens to a network, that will increase the stability of the network and you will also get interest from it. Another form of staking is staking liquidity pool tokens that you’ve earned from liquidity – it will allow you a double profit, basically since you’ll be farming cryptocurrency.
- Lending. It is possible to lend cryptocurrency to other users for a set interest. If you do this, make sure that you use a smart contract.
- Borrowing. Yielding with borrowed coins can earn you profit. It functions in the same way regular money would – you’d keep all the profits after you pay the user back with interest.
- Liquidity providing. If you keep the liquidity pools up and running, you can also earn a profit from it. Swapping tokens you provide to the pool will earn you a trading fee, which you can keep for yourself.
How did Yield Farming Become Popular?
Now that you’ve learned something more about the types of yield farming, it is time to learn how did yield farming become popular. Ever since the COMP token (a governance token of the Compound Finance ecosystem) became popular, it allowed yield farmers to earn profits by providing liquidity in a pool.
Pic 2: https://pixabay.com/photos/leather-wallet-business-cards-visa-3080553/
As soon as users realized that they can increase their profits by staking, lending, borrowing, or providing liquidity, they started doing that and earning a profit from their investments.
Popular Yield Farming Protocols
There are several yield farming protocols you might want to learn more about and they are:
- Aave. This is an open-source liquidity protocol for borrowing and lending crypto. It is one of the most popular protocols currently active with a market worth of around $3.4 billion.
- PancakeSwap. PancakeSwap is one of the newer (launched in 2020) protocols out there that is rapidly growing. What makes PancakeSwap special is that it allows users to earn a profit by providing liquidity.
- Uniswap. You can’t go wrong with UniSwap. It is one of the finest decentralized exchange networks currently available which allows users to earn interest on crypto holdings.
Risks of Yield Farming
One of the biggest risks of yield farming is the turbulence of the market. The values of cryptocurrency often change – sometimes that benefits the users, sometimes it doesn’t. Hopefully, this example will help you understand what are DeFi risks better:
Someone deposits 1000 tokens into a liquidity pool. Due to the volatility of the crypto, the value of the tokens drops by 25%. They are still in the pool and the user has an impermanent loss of 25%. The tokens are still in the pool, but if the user would pull them from the liquidity pool, they would not come even or profit. The vice versa is possible as well, naturally.
Is Yield Farming Safe?
There are three things you will need to think about if you decide to try yield farming – hacking, scamming, and volatility:
- Hacking. Hackers could potentially access your wallet and steal crypto from you. This is something that doesn’t happen often (or at all, actually due to protection), but it is still a risk.
- Scamming. Scammers are everywhere – from regular con artists to online scammers who want to get money for free. Be careful who and where you trust when dealing with crypto.
- Volatility. The prices on the market change on a daily basis. Even the best yield farming strategy can fail due to volatility, but it can also earn you massive profits.
Keep an eye out for these yield farming risks.
Conclusion
Overall, yield farming could be a decent way of increasing your income. Either by staking, lending, borrowing, or liquidity providing, you can earn a sufficient profit depending on how much you invest into it. How yield farming works is that it is not always safe and secure, and you might even lose some profits. Learn a bit more about yield farming info before you decide to get into it, but if you do, you should be able to pull it off perfectly!
FAQs
It is never too late or too early to start yield farming. The cryptocurrency market is active and ongoing and you should be able to earn a good profit if you know how to do it, not when to do it.
Sadly, you can get scammed when yield farming. It all comes down to who you can trust and how you do your transactions and which software you use. Stick to the standardized options and you should be fine!
You can earn as much as you are willing to invest – the process is proportional. However, you can also lose profits if the market drastically changes. For as long as you know what you are doing, there shouldn’t be any problems.
