Due to the inherent volatility of the crypto market, many crypto traders are now focusing on generating passive income rather than actively trading cryptocurrency, which can wipe out all of their capital. Yield farming and staking are the two most popular ways to generate passive income from your cryptocurrency investment. In this article, we will discuss what yield farming is and how it differs from staking. We will also tell you about some of the platforms that can help you get solid returns through yield farming.
What is yield farming?
Yield farming is a process through which one can increase their crypto holdings through lending. Now the question that must come to your mind is “How does this work?”. Yield farming is possible due to the growth of decentralized finance (DeFi) platforms that require a large amount of cryptocurrency for trading/lending/borrowing and other activities on the blockchain. Creating such a huge cryptocurrency pool is not possible with your own investments. Because of this, these DeFi platforms rely on others’ crypto holdings to conduct the above activities. These platforms pay interest for using cryptocurrencies of others.
In yield farming, crypto investors deposit their cryptocurrencies into liquidity pools that are used by DeFi platforms for trading, lending, and borrowing. Automated market makers also need these pools to offer automated trading services. These liquidity pools allow AMMs to increase a coin’s trading volume and therefore its value.
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In yield farming, depositors generally earn crypto tokens to secure their holdings on DeFi. If the price of these earned tokens increases, so does the return. It is noteworthy here that the reverse is also true.
The liquidity provider can make a good profit until fewer people/investors know about it. As more people start depositing their currencies into the liquidity pool, the value of returns will begin to decline.
This allows us to see the risks associated with yield farming, such as extreme volatility and rug pulls. Rug pull means that the project developer abandons the projects and runs away with all the funds (as there is no middleman involved).
How do I start yield farming?
There are many DeFi platforms from which you can start yield farming. The interest rate on deposits depends on the demand. Liquidity providers can move their funds across the DeFi platforms to maximize returns.
Here is a list of some yield farming platforms.
Spirit: This is a liquidity market protocol that borrowers and depositors can participate in. Aave is an open source protocol that allows anyone to interact with the UI. In addition, it is safe and has been tested. Here, the transaction fee depends on the transaction complexity and network status.
connection: Compound works on the Ethereum blockchain, and here the interest rate is derived from the supply and demand of the tokens. To ensure a high level of security, it is checked and audited.
curve financing: Curve Finance is based on the Ethereum blockchain. It claims to use locked funds more efficiently than any other DeFi platform. It offers a large list of stable coin pools.
Suggested Literature: What are stablecoins? Top 3 assets by market cap in this category
Which is Better Yield Farming or Staking?
Yield farming and staking have caught the attention of many investors, but both have their own pros and cons. Staking offers a steady return, while returns from yield farming are volatile and unpredictable. In addition, the funds (for some projects) are limited in time. However, the associated risk is also greater. There is a risk of high volatility, security loss or carpet pulling.
Related article: Five crypto platforms in Australia that offer the highest staking rewards
Risk Warning: Trading cryptocurrencies involves a high level of risk, including the risk of losing some or all of your investment, and may not be suitable for all investors. Cryptocurrency prices are extremely volatile and can be affected by external factors such as financial, regulatory or political events. The laws that apply to crypto products (and how a particular crypto product is regulated) are subject to change. Before deciding to trade any financial instrument or cryptocurrency, you should fully understand the risks and costs involved in trading the financial markets, carefully consider your investment objectives, level of experience and risk tolerance, and seek professional advice if necessary. Kalkine Media cannot and does not represent or warrant that the information/data available here is accurate, reliable, current, complete or suitable for your needs. Kalkine Media accepts no liability for any loss or damage arising out of your trading in or reliance on the information shared on this website.
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