Yield farming is an investment strategy in DeFi that allows investors to earn rewards from transaction fees and interest. It is very similar to earning interest from a traditional bank account, except with banks there is no transparency as to how your money is being used for profit. As of May 2022, the average interest rate on savings accounts is 0.05%, while many DeFi yield farmers are raking in more than 100% annualized returns. How do these people make such high returns? And why does yield farming continue to gain mainstream attention? Let’s find out!
First, we want to be clear that yield farming is not free money out of thin air. The concept is that investors lend or use their wealth to earn returns, which is very similar to putting money into a savings account. At the same time, banks use users’ deposits to lend them to borrowers. Banks charge their borrowers high interest rates and then give you back a tiny fraction of the income they made lending your money.
Yield farming is also known as liquidity farming because investors can not only deposit their assets into a loan log, but also deposit and deploy them into a liquidity pool. This method earns liquidity providers a percentage of transaction fees charged from trades within an exchange. Staking involves locking cryptocurrency for a period of time, which is an excellent strategy for HODLers to earn even better income from otherwise idle assets.
Yield farming has exploded in recent years due to its extremely lucrative nature. A three-digit APY is not uncommon and the sector shows no signs of slowing down.
Because investors essentially interact with smart contracts without intermediaries, one of the biggest risks is a bug in the code that bad actors can exploit to their own advantage. As can be seen in crypto news, this is the risk with the greatest impact.
Volatility is another issue that creates a common risk known as impermanent loss. Most liquidity pool structures require investors to deposit two different assets as a pair in order to participate as a liquidity provider. Since cryptocurrencies are subject to price fluctuations, the value of your deposited assets may end up being less than if you had not deposited them.
Investors are exposed to these risks in their search for attractive interest rates. The good news is that DeFi is constantly growing and pioneers in the space are looking to strengthen the integrity of the decentralized technology.
Wombat Exchange is a stablecoin exchange platform that is deeply dedicated to minimizing the risks associated with yield farming. It continues to innovate and lead with its users in mind, prioritizing security, protection and how users can better benefit from its platform. Let’s take a look at some of the most valuable developments that have paved the way for a better yield farming experience.
Unilateral pelvic structure
If you have encountered fickle losses in the past, you will find that this risk is unavoidable in most other protocols. Modifying and evolving existing designs, Wombat allowed for a one-sided pool. In this context, investors no longer have to deposit two tokens at the beginning – only one is required. This unpaired pool structure essentially eliminated fickle losses.
Introduction of the subsidiary pool
Although stablecoins are designed to hold their value constant against the asset to which they are tied, different stablecoins have different depegging risks. There are established stablecoins such as $USDC $USDT $DAI $BUSD available in Wombat’s main pool.
The Subsidiary Pool is introduced to give users more choices and opportunities to earn while managing risk. This pool contains higher risk assets and such a structure is put in place to prevent pools from affecting each other in case one of them loses its bond. This mechanism protects users’ funds from being withdrawn from the pool in case of black swan events.
commitment to safety
Wombat has put a lot of effort into security. In the event that a protocol is exploited by hackers, there is a risk of losing millions of dollars in user funds. Wombat takes this matter very seriously and has been audited by three leading blockchain security firms to ensure all security measures are in place.
Wombat Exchange is a multichain stableswap, resident on the BNB chain, focused on overhauling the stableswap experience with its innovative algorithm design. Wombat’s vision is to fuel DeFi’s growth and push boundaries with greater capital efficiency, enhanced accessibility and scalability, with adoption in a multi-chain world. To learn more visit wombat.exchange or follow us on the following social channels:
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