Yield farming is one of the many memes created by the DeFi community. While it's a term that gets thrown around loosely, there is a narrower criteria to define what yield farming is: it often requires providing liquidity or lending liquidity in a permissionless DeFi protocol in order to passively to earn income. This leads to traders…
Yield farming is one of the many memes created by the DeFi community. While this is a term that is thrown around loosely, there are narrower criteria to define what yield farming is:
- Earning passive income often requires providing liquidity or lending liquidity in a permissionless DeFi protocol.
- This leads to traders earning more than one form of income at the same time; a lending interest or liquidity provider fee, as well as additional token rewards in the form of the protocol's native token
Yield farming programs, also known as liquidity mining, were developed in DeFi by Synthetix, a protocol that allows on-chain exposure to any asset using derivatives. In yield farming, a protocol rewards its early users by paying them with the protocol's native token such as COMP, YFI, and yes, even PICKLE and YAM.
This is equivalent to Web3’s customer acquisition cost – paying early users with the native token that powers your DeFi application, and often includes voting rights on future upgrades to the protocol. Imagine if Facebook could have rewarded early Facebook users with its own Facebook token, allowing users to vote on Facebook's future and earn some return by trading the token.
Today, there are even simpler examples of yield farming like Compound Finance, where everyone who borrows or lends on Compound continually earns a portion of the daily issued COMP, Compound's governance token. COMP gives users a voice in future Compound Protocol upgrades and proposals – but they can also easily sell COMP on an AMM like Uniswap.
Yield farming is not just about generating returns over a short period of time from hyperinflationary tokens. When implemented in DeFi with well-designed incentives and strong product-market fit, yield farming can quickly increase liquidity in the most promising future DeFi applications. It is no coincidence that Synthetix has remained one of the top 10 DeFi apps in TVL and users over the past two years.
Note: Subscribe now and join over 100,000 subscribers and stay up to date on the latest crypto, DeFi and NFT content.
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.