In the world of cryptocurrency (crypto), since the appearance of DeFi, there has emerged another term called “Yield farming”.
Nowadays, the buzzword “Yield farming” is being widely used as a term, a new trend in response to the “madness” of the DeFi world. Users are “planting” native assets to “harvest” DeFi tokens of increasing value.
So, What is yield farming, and how you can profit from it? Let’s find out!
What Is Yield Farming?
In crypto “agriculture”, for farmers, “yield” means crop yield, which is a measure of the total amount of agricultural products they harvest. Here, “farmer” is the user, “yield” is the interest they earn on the principal assets they deposit on the base assets such as Dai, USDC, and USDT as they are put into the exchanges. DeFi platforms like Compound, Aave…
Yield Farming is the term for those who generate as much return as possible from their invested assets by providing liquidity for DeFi (Decentralized Finance) protocols.
To be more specific, Yield Farming is a method of earning interest and transaction fees on the DeFi platform. Investors who deposit into the liquidity fund of a coin pair will receive a portion of the fee when the user converts those two units.
Why Are Investors Attracted To Yield Farming?
With traditional finance, when investors deposit money in a bank, they lend the deposit to the bank and receive a percentage interest based on the amount deposited. With Yield Farming, investors will lend their own cryptocurrency, in return they will receive fees and interest.
However, in the crypto world, fees and interest are not as important as the fact that investors are involved in lending/lending transactions with newly issued cryptocurrencies.
This is to say that for Yield Farming, investors can really get high returns if the cryptocurrency they lend rises in price.
Yield Farming is a new form of investment that helps investors get high returns. So it is not difficult to understand why Yield Farming attracts so many investors.
How Does Yield Farming Work?
Yield Farming is mainly done using ERC20 tokens on Ethereum and the rewards are the same. There are several protocols available in the DeFi ecosystem that allow users globally to lock up their crypto and monetize it. Farmers will continuously transfer their own funds according to different protocols to earn high profits for themselves.
Yield farmers can be borrowers, lenders, or exchange tokens with each other through the Liquidity pool.
Explanation Liquidity pools: Smart contracts that contain money in them. These liquidity pools allow users to borrow, lend or exchange tokens.
Between smart contracts, there will be fees for each transaction. These fees are considered revenue for liquidity providers (Liquidity Providers, for short: LPs). In addition, there is Liquidity mining, which means that in addition to fee revenue, LPs also receive additional tokens for their revenue.
Farmers have found opportunities for profitable lending in DeFi, one of which can generate 100% profit. You didn’t read it wrong! Exactly 100% of that profit, a number that is hard to come by with the traditional banking system.
That is why Yield Farming has become a hot topic in the crypto world in general and DeFi in particular. DeFi has opened up so many opportunities for all of us to join to make money.
Yield Farming’s Great Potential
Yield Farming is a completely new keyword and it will take a long time for it to become an effective market. Overall, there are a lot of opportunities around Yield Farming. We can hardly predict how big it could be in the coming years and what YF will bring to the financial sector. Can only wait and see.
Yield Farming is likely to attract more users to DeFi to use its products and protocols because the benefits YF offers are so compelling.
According to DeFi Pulse, as of September 2020, there is $11 billion in crypto assets locked in DeFi. This shows how big Yield Farming can be in the future.
A Comprehensive Guide To Yield Farming In Crypto For Newbies
The basic farm process as follows:
Preparation: Must have a Defi wallet created with Defi Wallet apps like Metamask, Trustwallet…
Step 1: Buy 1 pair of coins you want to farm in that system (BSC, Solana, Heco, Polygon…)
Step 2: Go to liquidity add that coin pair to get the lP token
Step 3: Go to the farm and click add the newly received lP token above and you’re done
Step 4: Time to harvest!
Step 5: When not farming, withdraw the lP token, then sell that lP token through liquidity.
A Few Notes Before You Get Started
How much capital do you need to participate in farming?
Any amount of capital is fine, but I recommend $1000+ because of transaction fees in the DeFi world range from $1-15/transaction. Spending a few hundred dollars on receiving profits is not much, so a few thousand dollars will be the best.
Is there any risk involved in farming in DeFi crypto?
Of course, there are. Here are some of the most common scenarios:
1. Floor collapse due to anonymous and disappeared floor owner or hacker attack.
2. Due to liquidity withdrawal on DeFi.
3. Due to the drop in the price of the token/coin pair added to the pool, there is a temporary loss.
4. Due to the lack of knowledge on how to work with DeFi wallets, it is attacked by hackers.
Which DeFi exchanges and ecosystems should newcomers join?
You can now join the ecosystem of Binance (Binance Smart Chain) because of low transaction fees and many high-quality financial products such as Pancakeswap, Pancakebunny, Autofarm, etc.
In general, Yield Farming is a new form of investment and has a lot of potential for development in the decentralized financial market. But in order to avoid unfortunate incidents, investors need to learn carefully about the form of operation, how to participate, and also the risks before making investment decisions.
Hopefully, the information in the article has provided you with an overview of Yield Farming. If you have any questions, don’t hesitate to contact us or leave a comment below.