What is yield farming? – Types, advantages, disadvantages and solutions | by 0xshawngmi | BlockTing

Yield farming is one of the most popular concepts in the decentralized finance (DeFi) space. Since last year, it has taken the entire environment by storm. It compensates investors for securing their crypto assets on a DeFi market.

This guide covers yield farming and its types, as well as its challenges and possible solutions.

The technique of betting your cryptocurrencies to generate more of them as passive income is called yield farming. Essentially, you bring liquidity into a platform and thereby receive incentives in the form of interest.

The process is the same as storing traditional money in a savings account. Savings are deposited into the bank’s general liquidity pool. Banks use this pool to lend to customers and provide them with funds. The premise of yield farming is similar, except instead of donating to a bank, you are donating to a lending platform.

All loans are stored in a smart contract and the borrower is required to post collateral prior to acceptance. You will receive interest on your tokens and crypto farming from the platform once they have repaid the loan.

Yield farming is part of what drives decentralized finance.

Of course, there are several ways for users to start farming new protocol tokens. The uproar started with Compound, which allowed users to convert their USDT to cUSDT and then deposit it on Balancer to help traders’ automatic market maker. However, over time, protocols have developed new strategies to increase yields for their clients. Types of strategies include:

The term “liquidity mining” refers to the practice of people using their crypto assets to offer liquidity to decentralized exchanges, allowing other traders to switch tokens quickly.

When a trader wants to convert ETH to MATIC, a centralized exchange like Binance connects buyers and sellers. However, for decentralized exchanges in 2020e, the protocols allow users to give liquidity to tokens to enable quick swaps at the best possible value.

When a user tries to exchange ETH for MATIC on a decentralized exchange (DEX) like Uniswap, the protocol deposits ETH and drains MATIC of the massive liquidity collected from liquidity providers. These liquidity providers are compensated by the traders who exchange tokens.

Curve Finance and Balancer are two platforms that enable liquidity mining.

While some protocols reward liquidity providers with fees, others add a new dimension to the equation by including a protocol token gift.

After the pools are infused with liquidity, users can earn native tokens through protocols such as yEarn and Compound. When the pool is smaller, the payout rate is often higher, attracting an increasing number of “farmers”.

Protocols like Ampleforth and BNS Finance distribute prices using liquidity pools from other platforms like Uniswap. Users must first create pools on Uniswap and then stake their Uniswap tokens on the platform to start farming protocol tokens.

Each protocol has a unique approach to rewarding consumers. Numerous platforms also have different use cases for their platform tokens.

One of the main benefits of yield farming is that it provides a viable alternative to holding cash in savings accounts. Yield farmers can earn far more interest through yield farming than regular banks. Holders with idle funds can lock their funds in DeFi protocols to generate additional cryptocurrencies, making it an excellent source of passive income.

Despite the numerous advantages of DeFi described above, there are some disadvantages. The most significant is the network congestion of the Ethereum blockchain. As a result, users have to pay high fees for agricultural businesses. As the number of pending transactions increases, the fees for confirming your transaction increase dramatically.

This poses another problem as it becomes difficult for traders to enter farming on a tight budget. Virtually all procedures require a minimum of $1000 to earn anything.

However, there is a workaround. Numerous projects are currently focusing on Layer 2 solutions to advance the DeFi industry. Layer 2 systems like Matic use sidechains to accelerate transactions and only transmit transactions to the mainnet at predefined intervals, so-called checkpoints.

Using Layer 2 protocols can quickly offload mainnet, speed up transactions, lower fees, and make DeFi and yield farming more accessible to everyone.

Numerous projects, such as EasyFi, have started developing second-level DeFi protocols. EasyFi aims to make yield farming accessible to everyone. As already mentioned, due to the shortcomings of the Ethereum network, it is being developed on top of the Matic network.

EasyFi will offer microcredit, credit default swaps and secured loans with credit delegation – a unique trust-based lending product of its kind not currently available in the market.

Farmers can earn “EASY” tokens by depositing their assets into liquidity pools and benefit from gas-free transactions.

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