Maybe you are too familiar with increasing the amount of cryptocurrency you own by exchanging, buying, and selling. However, a new method that helps investors increase profits many times when investing in cryptocurrencies is Yield Farming.
Since the beginning of 2020, a huge amount of funds has been poured into the Ethereum network, and the huge profits that Yield Farming investors have made on Ethereum have sent the market reeling. The world of easy loans on DeFi has appealed to both borrowers and investors. Some DeFi networks allow investors to yield farming today such as Aave, compound, yield.app, etc. So, what is Yield Farming and how can we profit from this new method. Let’s find out the detailed analysis information below.
What is Yield Farming?
Yield Farming is understood as a form of liquidity mining, a way you earn rewards (tokens) for locking some cryptocurrency on the system. This bonus can be exchanged for money.
Yielding Farming is not for everyone because it requires investors to understand the decentralized financial system and have a smart investment strategy. Most of the people who enjoy huge profits from yield farming are investors with a lot of capital invested.
To learn about Yield Farming, you need to understand tokens, liquidity pool, liquidity providers.
COMP is a governance token that provides governance rights to token holders. DEXs began to distribute these tokens algorithmically with their incentives to attract liquidity providers to provide liquidity to the pool.
DeFi projects have mined tokens with massive capital investment schemes. Approximately $10 billion has been locked up in DeFi for liquidity.
Liquidity Pool is a smart contract on the DeFi platform that contains cryptocurrency, tokens in it. Liquidity providers will provide liquidity in return for token rewards. This reward is generated from transaction fees on the underlying DeFi platform or some other source.
To make it easier to understand, for example, if you own a volume of tokens, you can send this token to another cryptocurrency exchange to receive more tokens according to the specified percentage of the exchange. Continue to transfer these tokens to a third exchange with the same process to receive more rewards.
How Does Yield Farming Works
Liquidity providers invest, provide liquidity to the Pool.
Pool works by allowing users to borrow, borrow, buy and sell cryptocurrencies, etc. Each transaction costs a fee. This fee is paid to Liquidity Providers at a percentage rate depending on each platform.
Or, some exchanges will return Liquidity Provider’s other tokens of market value.
Yield Farming makes the cryptocurrency market much hotter and attracts a huge amount of investment to the market by bringing huge profits to investors. At first, investors pour money into buying cryptocurrencies. Then, investors receive interest if the value of money increases. Investors start yield farming to enjoy profits and get valuable tokens back. When these tokens’ price increases, investors will receive compound interest. By this process, a lot of funds are constantly pouring into the crypto market.
Some outstanding Yield Farming projects that attract many investors today are Yearn Finance, Yield. the app, Aave, COMP, Curve, Serum, Just, etc.
Uniswap is a DEX exchange that makes headlines in 2020. LPs stake an equivalent value of two tokens to create a pool. With its diverse pools, Uniswap is a popular choice for many liquidity providers.
Maker is a decentralized credit platform whose native token is DAI. Liquidity providers use Maker to mint DAI or use it in Yield farming strategies.
Recently, Aave yield farming seems to be quite interesting when it is chosen by many “farmers”. Aave is a decentralized protocol for lending and borrowing. By offering a wide selection of pools, Aave is also a name of interest when it comes to farming.
PancakeSwap is an AMM-based exchange that runs on the Binance Smart Chain. The decentralized exchange protocol has surged to the top in the DeFi space. The current 24-hour trading volume is 400 million USD, LPs can provide liquidity to get CAKE.
Pros and Cons of Yield Farming
Maximize interest received when transferring Tokens between DeFi platforms like Yield. app because of the different reward policies of each platform.
Leverage can be used to increase return on investment. Investors deposit money as collateral and borrow other currencies. Then repeat the above step for the borrowed amount to generate accrued profit.
Yield Farming participants are exposed to high risk if they want to achieve double or triple-digit returns. When the loans they make exceed a certain amount of collateral.
Risks with smart contracts occur if the platform fails, the liquidity source is attacked.
A combination of various types of DeFi platforms, automating key processes and more complex incentive structures, different technological and governance approaches, etc. will create new types of security risks for users.
All investors can do transactions and trade easier in the DeFi network only with a stable internet connection. DeFi helps financial transactions fast and significantly reduces charges. And not only that – DeFi lending protocols offer higher deposit rates along with lower fees and attractive terms on loans and lines of credit.
Now, DeFi provides equal and free access to financial services to anyone who would be unable to participate due to lack of capital or political, social, and economic issues. Furthermore, DeFi enables yield farming – allowing investors to borrow and lend their crypto at significantly higher rates than traditional banks and investments.
Yield Farming is currently attracting a lot of investors to join and pour money into DeFi. This indirectly increases the trust of users in the decentralized financial system, although this is still a new concept.
With a rather complicated way of working, not everyone finds the opportunity to earn high profits with this form. Experts say that Yield Farming has high risks but will bring huge returns, as long as you need to do thorough research and perform a risk assessment before investing.
We encourage you to choose a platform to reliably manage your investment flow like the Yield.app and the support team will guide you in detail before you start your farming business.