What is yield farming?
Yield farming is the lending of cryptocurrency assets to DeFi protocols for the assets or “liquidity” to be used by others. In exchange for lending digital assets, users are rewarded with more cryptocurrency tokens. It’s a way for cryptocurrency investors to generate passive income from digital assets that would otherwise sit idle.
The process is similar to staking as it involves escrowing and locking cryptocurrency holdings for a period of time. However, while staking uses cryptocurrency tokens to power a blockchain or protocol, yield farming uses cryptocurrencies as liquidity for other investors or traders.
Decentralized finance, or DeFi, aims to decentralize traditional financial services. By using smart contracts, which are programmable functions that are updated on the blockchain, DeFi protocols are able to run an automated, trusted, and permissionless service.
How does yield farming work?
Yield farming, also known as “Liquidity Mining” or “DeFi Yield Farming”, is a technologically sophisticated endeavor based on blockchain networks.
Yield farming participants follow the following process in hopes of generating revenue:
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Mission: Investors pledge their crypto assets to a liquidity pool. Typically, this is done by tying to DeFi protocols that are focused on lending or crypto trading.
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Lock: Allocated cryptocurrency is subject to a hold period. During the lockout, the staked coins are not accessible and are borrowed by other investors. Crypto traders can secure additional coins and speculate on market fluctuations via a decentralized application or “dApp”.
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Payout: Investors are incentivized to use their cryptocurrencies through interest rates or additional coins. Agricultural yields are calculated and expressed as annual percentage yield (APY).
Advantages
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High returns
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profitability
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User friendly
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Force a hard fork
risks
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Scams and Rug Pulls
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Chop
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Ephemeral Loss
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regulation
Popular yield farming platforms
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SPIRIT
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MakerDAO
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Uniswap
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PancakeSwap
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Connection
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Longing.Finances
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syntheticix
The total market cap of the yield farming sector currently stands at $5.13 billion, with a volume of $869.79 million in the last 24 hours. DeFi protocol Uniswap leads the sector with a market cap of $4.85 billion, while Trader Joe has seen the biggest gains, up 4.15% in 24 hours.
Yield farming can be simple or complex, but offers cryptocurrency investors an opportunity to earn a little passive income from otherwise untapped investments. It is up to the individual to decide whether productive farming is an appropriate means of achieving their financial goals.
Source: cryptoslate, CMC, Finder, Blockchain Council, fxcm
Image source: Credit to the rightful owner
DISCLAIMER: This is not trading or investment advice. We recommend that you do your own research before investing. It is not a trading recommendation.
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