Decentralized finance (DeFi) exists to democratize the financial system by eliminating central authorities like banks. Did you know that cryptocurrency holders can play the same role that banks have traditionally had? Here is what yield farming in DeFi is and how it works.
What is yield farming?
Broadly speaking, yield farming employs 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 earn passive income – by lending coins or tokens via decentralized applications (dApps), for example DEXs (decentralized exchanges), crypto wallets and more.
Consider discovering it decentralized money protocols.
How yield farming works
Users lending their crypto assets are referred to as Liquidity Providers (LPs). First, LPs need to 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 rate earned on an investment in one year, factoring in the effects of compound interest.
Types of yield farming
Yield farming includes becoming an LP as well as lending, borrowing and staking.
become an LP
For example, users deposit coins with a DEX to provide trading liquidity. 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.
loan
Lending is a fundamental practice in traditional finance and is also very popular in DeFi, where anyone can become a lender. And not just in terms of 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 a variety of purposes — such as lending to other crypto enthusiasts or staking, to name a few.
Mark out
Crypto 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 blocking funds in a crypto wallet for use in proof-of- Expose Stake (PoS) process.
We encourage you to learn more about how staking works by reading our Guide to staking crypto in 2022.
Coinmetro is a fully licensed FinTech ecosystem that offers you the opportunity to earn annual staking rewards just for holding coins on its platform. Registration to our platform to earn passive income the smart way.
The central theses
Yield farming is becoming more mainstream as crypto adoption increases. The concept of lending at profitable rates 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, there are certain risks involved. 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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