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Yield farming in DeFi
Decentralized Finance (DeFi) serves to democratize the financial system by abolishing central authorities such as banks. Did you know that cryptocurrency holders can play exactly the same role as banks traditionally? Here’s what yield farming in DeFi is and how it works.
What is yield farming?
Broadly speaking, yield farming involves using crypto assets to potentially maximize returns on those assets. Best of all, anyone can do it, which means yield farming is an alternative way to generate passive income – by lending coins or tokens via decentralized applications (dApps), for example DEXs (decentralized exchanges), crypto wallets and more.
Consider discovering decentralized money protocols.
How yield farming works
Users lending their crypto assets are referred to as Liquidity Providers (LPs). First, LPs must lend their coins or tokens to a liquidity pool — a collection of funds locked in a smart contract-based dApp.
Once the coins or tokens are locked in a liquidity pool, LPs earn interest — sometimes fees — generated by the DeFi platform hosting the liquidity pool.
Estimated agricultural yields are calculated based on Annual Percentage Yield (APY). In simpler terms, it is the interest rate earned on an investment in one year, factoring in the effects of compound interest.
types of yield farming
Yield farming includes obtaining an LP, as well as lending, borrowing, and staking practices.
become an LP
For example, users deposit coins with a DEX to provide trading liquidity. The exchanges then charge a small fee for exchanging the tokens, which is paid to LPs. In addition, fees can also be paid in new liquidity pool tokens.
lending
Lending is a fundamental practice in traditional finance and is also very popular in DeFi, where anyone can become a lender. And not just with regard to yield farming. Smart contracts allow you to lend your crypto assets to like-minded borrowers and earn interest.
Lend
When borrowing, coins or tokens can be pledged as collateral for the loan, and the borrowed funds can then be used for various purposes – such as lending to other crypto enthusiasts or staking, to name a few.
Mark out
Cryptocurrency staking has been on the rise since 2020, and there’s a good reason for that: staking is a low-risk practice of buying and holding or locking funds in a crypto wallet for use in the cryptocurrency Making available Proof-of-Stake (PoS) process.
We encourage you to learn more about how staking works by reading our guide to cryptocurrency staking in 2022.
Coinmetro is a fully licensed FinTech ecosystem that offers you the chance to earn annual stake rewards for just holding coins on its platform. Sign up on our platform to start earning passive income the smart way.
The central theses
With the increasing adoption of cryptocurrencies, yield farming is becoming more mainstream. The concept of lending for profit at interest has long dominated traditional finance, and yield farming is just a digitized and more profitable version of it.
Always remember that while yield farming is a potentially profitable endeavor, it also comes with certain risks. The crypto market is extremely volatile and a lot can happen while your crypto assets are frozen.
To learn more about decentralized finance and passive income opportunities, join the discussion on our Discord and Telegram channels. Benefit from our constantly growing community, be inspired and exchange ideas with like-minded people.
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