Muir Dougherty posted an update
Decentralised finance (DeFi), a growing financial technology that aims to get rid of intermediaries in financial transactions, has showed multiple avenues of revenue for investors. Yield farming is but one such investment strategy in DeFi. It requires lending or staking your cryptocurrency coins or tokens to get rewards as transaction fees or interest. This is somewhat much like earning interest from the bank-account; you are technically lending money for the bank. Only yield farming can be riskier, volatile, and sophisticated unlike putting money in a financial institution.
2021 has turned into a boom-year for DeFi. The DeFi market grows so quick, and it’s really even strict any changes.
Why’s DeFi so special? Crypto market provides great opportunity to enjoy better paychecks in several ways: decentralized exchanges, yield aggregators, credit services, and also insurance – you’ll be able to deposit your tokens in all these projects and have a reward.
Though the hottest money-making trend has its tricks. New DeFi projects are launching everyday, interest levels are changing constantly, many of the pools disappear – and it’s a major headache to keep track of it but you should to.
But note that purchasing DeFi can be risky: impermanent losses, project hackings, Oracle bugs and also volatility of cryptocurrencies – these are the basic problems DeFi yield farmers face constantly.
Holders of cryptocurrency have a very choice between leaving their own idle in a wallet or locking the funds in a smart contract so that you can contribute to liquidity. The liquidity thus provided may be used 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 strategies to employing their assets to earn returns. For that the assets are used, the returns may take many forms. For instance, by being liquidity providers in Uniswap, a ‘farmer’ can earn returns as a share in the trading fees whenever some agent swaps tokens. Alternatively, depositing the tokens in Compound earns interest, as these tokens are lent over to a borrower who pays interest.
But the prospect of earning rewards doesn’t end there. Some platforms in addition provide additional tokens to incentivise desirable activities. These additional tokens are mined with the platform to reward users; consequently, this practice is called liquidity mining. So, as an example, Compound may reward users who lend or borrow certain assets on their platform with COMP tokens, which are the Compound governance tokens. A lender, then, not simply earns interest but in addition, moreover, may earn COMP tokens. Similarly, a borrower’s interest rates could possibly be offset by COMP receipts from liquidity mining. Sometimes, including once the value of COMP tokens is rapidly rising, the returns from liquidity mining can greater than make amends for the borrowing interest that has to be paid.
For those who are prepared to take additional risk, you can find another feature which allows a lot more earning potential: leverage. Leverage occurs, essentially, once you borrow to invest; for instance, you borrow funds from a bank to invest in stocks. Poor yield farming, an example of how leverage is made is basically that you borrow, say, DAI in a platform such as Maker or Compound, then make use of the borrowed funds as collateral for more borrowings, and repeat the process. Liquidity mining can make mtss is a lucrative strategy once the tokens being distributed are rapidly rising in value. There is, of course, danger this doesn’t occur or that volatility causes adverse price movements, which may bring about leverage amplifying losses.
For details about what is yield farming have a look at our web page