What is yield farming
Crypto for Advanced
Yield farming is the technique of maximizing returns using decentralized financing (DeFi). On a DeFi platform, users lend or borrow cryptocurrency in exchange for cryptocurrency. Farmers that wish to boost their crop production might use more complicated strategies. Yield farmers, for example, might continually transfer their cryptos between several lending platforms in order to maximize their profits.
Yield farming is a method of earning money by investing in a decentralized application, or dApp. Crypto wallets, DEXs, decentralized social media, and other dApps are examples. Decentralized exchanges (DEXs) are commonly used by yield farmers to lend, borrow, or stake coins in order to earn interest and speculate on price volatility. Smart contracts, which are bits of code that automate financial agreements between two or more parties, make yield farming possible via DeFi.
There are multiple types of yield farming.
- Lending where coin or token holders can use a smart contract to lend crypto to borrowers and receive interest on the loan.
- Borrowing where farmers can use one token as security for another token loan. The borrowed monies can then be used to cultivate produce. This allows the farmer to maintain their initial investment, which may appreciate in value over time, while also receiving interest on the borrowed coins.
- Liquidity provider where to offer trading liquidity, users deposit two currencies to a DEX. To switch the two tokens, exchanges charge a nominal fee, which is paid to liquidity providers. This charge might be paid in fresh liquidity pool (LP) tokens on occasion.
- Staking which in the universe of DeFi, have two types of stakes. On proof-of-stake blockchains, a user gets paid interest in exchange for pledging their tokens to the network as security. The second option is to stake LP tokens obtained by providing liquidity to a DEX. Users may earn interest twice since they are compensated in LP tokens for delivering liquidity, which they can then invest to gain more yield.
Annualized yield returns are commonly used. Over the course of a year, the potential returns are computed. Annual percentage rate (APR) and annual percentage yield (APY) are two often used metrics (APY). Compounding, or reinvesting earnings to create higher returns, is not taken into consideration by APR. Remember that the two measures are only predictions and guesses. Even short-term benefits are difficult to predict accurately. Why? Yield farming is a fast-paced, highly competitive sector with constantly shifting incentives.
The most known yield farming protocols are:
- Curve Finance
- Aave, which also has a token AAVE
- Uniswap, with token UNI
- PancakeSwap with token CAKE