The total value locked (TVL) has however shot through the roof since the DeFi boom of late 2020, currently hovering around $100 billion. This growth is mainly facilitated by the yield farming techniques where user get incentivized to предоставить liquidity to the decentralized platforms. This guide will make it easy for you to get started in yield farming and offer a means to improve your financial life in the world of DeFi.
What is Yield Farming?
Yield farming or liquidity mining is the process by which one is paid in order to provide their tokens to DeFi protocols. Yield farmers are also referred to as liquidity providers relaying its crypto assets to a pool for decentralized platforms in exchange for tokens and transaction fees. It is one that allows the owners of Crypto to make passive income as well as help increase aggregated liquidity on DeFi.
How Does Yield Farming Work?
The best comparison one can make when it comes to yield farming is with a savings account though the concept is at a higher level. Here investors (referred to as liquidity providers) contribute their money to what can be termed as ‘liquidity pools,’ which are merely smart contracts on various DeFi platforms. As a result of offering their assets for becoming liquid, they receive revenue generated in the form of transaction fees, interest, and native tokens of the protocols.
Frequently, yield farming can represent an intricate of making money out of money, including the use of advanced techniques. For example, when you supply assets to a protocol such as Curve Finance, you will receive a token showing your share in that pool. You can then use this token in another DeFi protocol to be used for other additional income streams which makes it highly liquid.
Yield farming is also a method of earning additional new crypto tokens without initially buying them. Some DeFi protocols offer governance, utility tokens as incentives for LPs, which makes it a great way to acquire assets.
Types of Yield Farming Strategies:
Yield farms include other activities in the following ways that can fit different risk preferences and investment horizon. Here are some of the popular yield farming methods:
Liquidity Provision: That means if you decide to add your tokens to a decentralized exchange’s liquidity pool, you’ll get the rewards. DEXs attach small fees for any trade which are collected and distributed among the liquidity providers relating to their portions within that pool. For your information, there are also bonus options available such as earning liquidity pool or LP tokens.
Lending and Borrowing: Many DeFi platforms operate under the format of Compound and Aave, for example, where people can contribute their crypto assets to act as collateral for loans. And to ensure the borrowed funds, borrowers, in return, pledge collateral, and lenders make their profits not only from the interest rates but also from other incentives such as governance tokens in the protocol.
NFT Farming: NFT farming is one of the features that have cropped up in several platforms, whereby users can earn tokens through staking the NFTs, or get NFT rewards for staking tokens. Non-Fractal Token farming can be considered relatively new but is already gaining popularity with the DeFi group.
How to Start Yield Farming on Compound:
To illustrate the yield farming process, let’s explore how to yield farm on Compound, a popular DeFi lending platform:
Head to www.compound.finance and go to the app.
Compounding involves connecting a DeFi wallet to the Compound.
Choose the network you would want to work with such as Ethereum or BNB Smart Chain.
Select the crypto asset you wish to lend and enable the token in the wallet.
Place your crypto asset and then sign the transaction.
After that, you are going to generate interest from the deposited asset that you have been holding out.
To withdraw, go through the process and select tokens withdrawal.
Congratulations! Congrats, the yield farming process on Compound has now come to an end.
Popular Yield Farming Protocols:
Here are some well-known DeFi platforms where yield farmers often provide liquidity:
Uniswap: An exchange that provides users with an opportunity to trade tokens without an intermediary. Liquidity providers also earn a percentage of the transaction charges and can be rewarded UNI tokens.
Curve Finance: Curves swaps have low slippage and fees and focus on stablecoin swaps which made it a prime choice for yield farming.
PancakeSwap: PancakeSwap is deployed on BNB Smart Chain and enables staking of the BEP-20 tokens, where users receive affiliate rewards in CAKE tokens.
Risks Associated with Yield Farming:
Yield farming is lucrative but comes with risks that should not be overlooked:
Impermanent Loss: This happens when there are disparities in asset within a liquidity pool in that traders can lose money if the relative prices of the assets diverge.
Smart Contract Risks: DeFi is based on code, and like all codes, these are vulnerable. Finally, as has been seen in history, hackers have a field day with DeFi protocols, so tread carefully.
Rug Pulls: Another form of this con is when the developers remove all tokens from a liquidity pool and then disappear with all the investments. The basic rule for any invested-in protocol is to do as much research as possible.
Market Volatility: Yield farming involves staking tokens in pools with a possibility of profit due to fluctuations in crypto markets, such that the assets you freeze are subject to market changes.
Regulatory Concerns: Currently, DeFi exists mostly in legal gray areas, thus there are places where users cannot claim their rights in case of fraud or loss.
The Future of Yield Farming
Yield farming has already changed, adopting new tactics and expanding the list of the supported assets. More investors are thinking of the environmental impact of crypto projects, which has made focus on sustainable protocols rise. Also, the interest by mainstream financial institutions in DeFi’s solutions suggests a future advance of the integration of the DeFi sector into traditional finance systems.
Is Yield Farming Safe?
Yield farming is how you can increase your amount of crypto, although, it contains technical and market risk. There is need to go for more research, be updated and also to know that it is not a one-off investment but a method that has to be managed and risks analyzed over time.
Can Anyone Participate?
Yield farming can be done by anyone who owns a crypto wallet and who has other crypto assets to invest. However, it is advisable to begin investing a small portion of capital then learn on how to invest the rest of the money gradually.
Key Metric: Total Value Locked (TVL)
TVL stands for Total Value Locked which reflects how much funds have been deposited into a DeFi protocol to measure the success of yield farming. Some of the tool where you can monitor TVL of top protocols include DeFi Llama, DeFi Pulse, and DappRadar.
Yield farming still holds the capability as one of the valuable and lucridious segment in DeFi. It is a risky business but if done with research and proper planning it can present the chance to collect rewards in the ever-evolving DeFi space.
