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Divi Blog | What is yield farming?

Yield farming is the attempt to get the highest possible return from the DeFi market. Yield farming is extremely high risk/reward and attracts investors of all sizes.

  • Everyone is welcome to dip their toes into DeFi yield farming.

  • It is a fascinating and rapidly evolving landscape.

  • It allows you to maximize your returns.

So how do you get the highest possible return from the DeFi market? Let’s get into that…

At the Divi DeFi platform, we have thought long and hard about and attempted to address the typical challenges of DeFi. With our cross-chain staking, you can leverage Layer 1 Divi Stakes while earning fees and LP token rewards. This is an industry first and we’re excited to introduce it to you! Stay tuned because this Divi double dip will be discussed in detail in an upcoming article.

Traditional yield generators in DeFi

The value of a token depends on the demand. If there is no demand, there is no value. Traditionally, marketing and advertising have taken a back seat; Yield farming is the primary value driver for new DeFi tokens.

Protocols/dApps distribute large amounts of value to users because farmers bring liquidity to the protocol/dApp. Remember, liquidity is king! It’s like taking your marketing budget and handing it directly to your stakeholders instead of creating ads. People will deposit large amounts to collect high percentage rewards. Is it sustainable? Not ordinary. High percentage bonuses tend to decrease quickly with time/additional deposits. However, with Divi, we’re releasing another industry first to make things different.

A simplified liquidity example:

In our previous article, you added equal parts ($100) of ETH and DIVI (ERC-20) to a liquidity pool. In exchange for your deposit, you received a new token, ETHDIVI, known as the LP token. In this example, the liquidity pool is currently worth $1000. After depositing $200 equivalent of ETH and DIVI (ERC-20), your LP token earns you 20% of the transaction fees in this pool.

In our example, a trader exchanges $100 ETH for $99 from DIVI(ERC-20). The transaction fee for this swap is $1* and because of your LP token, you earned $0.20 on this transaction.

If you want to regain access to ETH, Divi(ERC-20) and earned transaction fees, you need to return the ETHDIVI LP token to the smart contract. This will refund the full amount of ETH, DIVI(ERC-20) and accrued trading fees.

*For example purposes only. Actual transaction fees will be detailed at a later date.

Understand return on investment (ROI).

With yield farming, it can be difficult to understand your actual return on investment. DeFi’s return on investments is commonly expressed in terms of either annual percentage return (APY) or annual percentage rate (APR). APY includes compounding in its calculation; APR not. Also note that APY is a snapshot of reward issuance as of the current date, not a guarantee of annualized returns.

Yield farming is DeFi’s most lucrative game. With Divi DeFi, we increase earning potential by allowing you to take advantage of the traditional benefits of DeFi and yield farming without sacrificing your Layer 1 staking rewards. However, there are risks associated with providing liquidity through a DeFi protocol like Uniswap. It is important that you understand risks such as slippage, flawed smart contracts and fickle losses. In our next article, we’ll cover these so you can understand them and be better prepared to mitigate these risks.

Ultimately, The success of the DIVI project depends on the support of our community. We want to give our community the insights they need to be successful in this space. If you need more clarification on this topic or anything DIVI or crypto related, jump on our discord. We love to learn and grow together.

Next: The Risks of DeFi

Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers

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