• Stafford Crowley posted an update 8 months ago

    Decentralised finance (DeFi), a growing financial technology that aims to take out intermediaries in financial transactions, has opened up multiple avenues of greenbacks for investors. Yield farming is one such investment strategy in DeFi. It involves lending or staking your cryptocurrency coins or tokens to have rewards available as transaction fees or interest. This really is somewhat comparable to earning interest coming from a banking account; you’re technically lending money on the bank. Only yield farming may be riskier, volatile, and complicated unlike putting cash in a bank.

    2021 has become a boom-year for DeFi. The DeFi market grows so quickly, and it’s even unpleasant any changes.

    Exactly why is DeFi so special? Crypto market offers a great possibility to enjoy better paychecks in lots of ways: decentralized exchanges, yield aggregators, credit services, and in many cases insurance – it is possible to deposit your tokens in most these projects and obtain a reward.

    But the hottest money-making trend has its tricks. New DeFi projects are launching everyday, rates of interest are changing all the time, some of the pools cease to exist – and it’s really a large headache to help keep tabs on it but you should to.

    But be aware that purchasing DeFi can be dangerous: impermanent losses, project hackings, Oracle bugs and volatility of cryptocurrencies – fundamental essentials problems DeFi yield farmers face all the time.

    Holders of cryptocurrency have a very choice between leaving their funds idle in the wallet or locking the funds within a smart contract as a way to bring about liquidity. The liquidity thus provided enables you to fuel token swaps on decentralised exchanges like Uniswap and Balancer, or to facilitate borrowing and lending activity in platforms like Compound or Aave.

    Yield farming is basically the practice of token holders finding means of using their assets to earn returns. Depending on how the assets are widely-used, the returns usually takes different forms. For example, by serving as liquidity providers in Uniswap, a ‘farmer’ can earn returns available as a share of the trading fees every time some agent swaps tokens. Alternatively, depositing the tokens in Compound earns interest, since these tokens are lent over to a borrower who pays interest.

    Further potential

    Though the possibility of earning rewards won’t end there. Some platforms in addition provide additional tokens to incentivise desirable activities. These extra tokens are mined by the platform to reward users; consequently, this practice is referred to as liquidity mining. So, by way of example, Compound may reward users who lend or borrow certain assets on his or her platform with COMP tokens, which are the Compound governance tokens. A lender, then, not only earns interest but also, in addition, may earn COMP tokens. Similarly, a borrower’s interest rates might be offset by COMP receipts from liquidity mining. Sometimes, including when the valuation on COMP tokens is rapidly rising, the returns from liquidity mining can over atone for the borrowing interest that has to be paid.

    For those who are prepared to take additional risk, there exists another feature which allows even more earning potential: leverage. Leverage occurs, essentially, once you borrow to take a position; for example, you borrow funds from the bank to purchase stocks. In the context of yield farming, an example of how leverage is done is you borrow, say, DAI in the platform like Maker or Compound, then utilize borrowed funds as collateral for further borrowings, and do it again. Liquidity mining may make this a lucrative strategy in the event the tokens being distributed are rapidly rising in value. There is certainly, of course, the risk until this does not happen or that volatility causes adverse price movements, which would cause leverage amplifying losses.

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