One of the most widespread ways to invest in DeFi is yield farming. It is useful for both users earning rewards and DeFi platforms maintaining their liquidity. Unsurprisingly, many people are interested in developing DeFi yield farming platforms. In this article, you will learn what you need for successful yield farming development and how to prepare if you decide to set up a DeFi yield farming protocol.
Table of contents:
- What is yield farming and how does it work?
- What is the difference between Yield Farm, Liquidity Mining and Staking?
- Development of the DeFi yield farming platform:
3.1 Types of yield farming
3.2 The process of developing the DeFi yield farming platform - IdeaSoft Expertise
What is yield farming and how does it work?
Yield farming is a new way for cryptocurrency owners to earn passive income. If you have tokens, you can borrow them on DeFi platforms and get even more tokens back. So how do so-called “yield farmers” make money?
Any DeFi platform where “farmers” can earn needs to get as many tokens as possible to ensure their fast exchange, i.e. high liquidity. To do this, cryptocurrency owners or “farmers” place their funds on the exchange and freeze them, creating a liquidity pool. A liquidity pool is a collection of funds locked in a smart contract. Token holders become liquidity providers for which they receive a commission in the form of tokens. The process described below is yield farming.
With yield farming, liquidity providers offer a way to exchange funds, allowing other users to borrow and sell money. For this they pay a commission to the stock exchange or platform, which pays the “farmer”. All tokens are placed on the exchange using smart contracts.
Yield farming can bring much more profit than investing in a down payment. However, there are some risks associated with the high volatility of cryptocurrencies themselves. There is also a risk that a smart contract contains an error that can lead to a loss not only of profit but also of all investments. Therefore, when developing a DeFi product, you should not forget about smart contract audits.
Yield farming is often confused with staking and liquidity mining. So let’s discuss the differences between staking and yield farming as well as liquidity mining.
What is the difference between Yield Farm, Liquidity Mining and Staking?
Staking is the process by which blockchains operate based on the Proof-of-Stake (PoS) algorithm. Stakers are users who configure a node themselves and join a PoS network to help the blockchain operate as a node validator. The main purpose of staking is not only to ensure the liquidity of the platform, but also to ensure the security of the blockchain network. The more users bet, the more decentralized the blockchain is and therefore more difficult to attack. However, when it comes to DeFi staking, yield farming can be considered one of its varieties.
Liquidity depletion is a mechanism that helps maintain balance in the market. DEX rewards users who contribute their assets to a common liquidity pool that increases the exchange’s liquidity. In a way, it’s similar to yield farming, but there are more processes going on. In most cases, liquidity mining is popular with liquidity providers who funnel their funds into different liquidity pools.
It is clear that the boundaries between these types of yield farming platforms are very thin. Their goal is to earn interest by providing assets to different protocols and platforms.
Development of a DeFi yield farming platform
There are various platforms and protocols in the market that allow users to generate passive income from their crypto assets. In addition, they have different yield farming strategies and features. The complexity and speed of yield farming development depends on the number of features. So, before we get into the details of the development process, let’s first take a look at some examples of yield farming platforms.
types of yield farming
These are 3 of the most popular yield farming platforms: Compound, MakerDAO, and Aave. Let’s talk about them.
- Connection is an algorithmic lending and lending platform. Any user with an Ethereum wallet can lend their funds to Compound’s liquidity pool and start earning income immediately after making a deposit. Prices are calculated algorithmically based on the relationship between supply and demand.
- MakerDAO is a decentralized lending platform that supports issuance of DAI tokens against deposit ETH, BAT, USDC, WBTC. DAI is a stablecoin whose exchange rate is pegged 1:1 to the US dollar. Yield farmers often use issued DAI to implement their investment strategies.
- Spirit is a decentralized loan and credit protocol that is very actively used by yield growers. The lending party (liquidity provider) receives aTokens in return for their funds. These tokens generate revenue immediately after their issuance.
Decentralized finance, and yield farming protocols in particular, is a breakthrough in finance, cryptocurrency economics, and informatics technology. So how is a DeFi yield farming platform developed?
The process of developing the DeFi yield farming platform
The development of DeFi yield farming is similar to the development of any other DeFi product. The yield farming development process consists of 5 phases: discovery, design, development, testing and the implementation phase. Now let’s discuss them in more detail.
- The discovery phase helps to define the goals of the project, create a list of features and choose a technology stack for its implementation. Business Analysts work with the customer at this stage to create a bridge between the business part of the project and the technical solution. We advise you not to skip this phase as it allows you to reduce the risks of the project, optimize the budget and reduce the time to market.
- The design phase is no less important than any other phase. One of the main disadvantages of DeFi products is often a poorly designed user interface. It is better to take the help of experienced designers who can help you not only to create an attractive interface, but also to find the best ways to present the advantages of your platform.
- The development phase begins after you have an idea of how exactly you want your platform to work, what mechanisms to use to reward users, and what features to implement. The basis of every DeFi product are self-executing smart contracts. Creating such contracts requires deep blockchain know-how as they need to work as intended and also be free from vulnerabilities. DeFi protocols are one of the most popular targets for hacking, so you should take the security of your smart contracts seriously.
- Testing and launching are inseparable processes. Before starting, it is imperative to check your product for errors. DeFi testing should not only include functional and usability testing, but also security testing. One of the best practices is to audit smart contracts before the protocol is launched. Smart contract auditing is a process that examines a section of code to identify errors, vulnerabilities, and risks. It is often done before the code is deployed and used on the main network, as it cannot be modified then.
This is how the DeFi yield farming development process works. If you are looking for a DeFi yield farming development company, you have come to the right place. Our experienced development team can help you develop an innovative DeFi project.
IdeaSoft Expertise
The DeFi sector has been receiving more and more attention lately. After Compound gave away COMP management tokens and some of their holders demanded a 100% annual return, the community became obsessed with DeFi yield farming. That’s why it’s better than ever to think about developing your yield farming.
IdeaSoft has been providing blockchain development services for more than 5 years. The in-house development team has extensive expertise in building crypto exchanges, crypto wallets, DeFi aggregators, lending/borrowing protocols, staking and yield farming platforms and more. IdeaSoft has been repeatedly named among the TOP blockchain development companies according to Techreviewer, Upvotes, DesignRush, and Clutch. Don’t hesitate to contact us to discuss your next project.
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