If youve read about decentralized finance (DeFi), its likely you have actually come across the curious term “yield farming.” as it ends up, yield farming does have a lot in common with growing crops.
Yield Farming is cryptocurrency trading and investing that didn`t really even exist till 2020. Yield farmers are producing fixed-income-like returns that can provide annualized interest rates comparable to percentages investors can not find anywhere else.
Yield farmers will often use a variety of different DeFi platforms, such as Balancer Pool or BEES.Social, in order to optimize the returns on their staked crypto funds.
These platforms offer variations of incentivized lending and borrowing from liquidity pools.
Just like many things associated to blockchain and cryptocurrency, the concept of yield farming can be intimidating at first, but we`re going to cover everything in this series of easy to understand videos.
What is DeFi (Decentralized Finance)?
Yield farming, put simply, is when cryptocurrency holders sock digital assets like bitcoin (BTC) and ether (ETH) or dollar-linked tokens like Tether (USDT) and DAI into blockchain-based, semi-autonomous lending and trading platforms in exchange for additional tokens as rewards. In the fast-growing subsegment of the crypto industry called decentralized finance, or DeFi, yield farming is able to provide investors with quicker and more profitable ways of making money than traditional ways of investing.
Yield farming includes smart contracts where putting crypto temporarily at the disposal of some start-up’s application earns its owner more cryptocurrency. Another term floating about is “liquidity mining.” These concepts have evolved into 2021 where even people new to cryptocurrency are investing.
Liquidity Pools and Liquidity Providers
DeFi is a decentralized platform that is built to offer sustainable interests for investors via a unique protocol made up of smart contracts that have actually been encoded using a decentralized distribution mechanism. This mechanism guarantees that routine interest payments are paid over a set period of cycles. These cycles have actually been configured into the protocol. Smart contracts offer the longevity that other yield farming projects lack and aims to construct a comprehensive ecosystem through the automated interest payments.
How Do Yield Farmers Make Money?
Is Yield Farming Profitable?
Yield farming isn’t simple. The most profitable yield farming strategies are highly complex and just suggested for innovative users. In addition, yield farming is generally more fit to those that have a great deal of capital to deploy. These larger investors are referred to as “whales“, however the platform at BEES.Social has been created for beginning crypto investors. BEES.Social offers the education and community of users that act as a colony of bees helping each other through the process of learning and investing into liquidity pools.
There are always risks in any type of investing. The term you hear entrepreneurs and investors say the most is, “high risk, high reward”. This is also true within liquidity mining. Liquidation risk, impermanent loss, and smart contract risk are all things farmers must understand, and take safety measures against.
Smart contracts. Due to the nature of DeFi, numerous protocols are built and developed by small groups with minimal spending plans. This can increase the risk of smart contract bugs. Even when it comes to bigger protocols that are audited by respectable auditing companies, vulnerabilities and bugs are found all the time. Due to the immutable nature of blockchain, this can result in loss of user funds. You require to take this into account when locking your funds in a smart contract.
Both require commitment, rotation and care. Liquidity providers, like farmers, wish to find the wealthiest soil and the most profitable fruit, and that’s no easy task. DeFi constantly presses towards uncharted locations, discovering convenient solutions to current problems. These protocols just work if they`re able to keep money circulating in their smart contracts.
With yield farming, the goal is to maximize a rate of return on capital by leveraging various DeFi protocols. A yield farmer will search for the highest yield by moving between numerous strategies. A profitable strategy is typically one with the least DeFi protocols such as compound, synthetix, or curve.
Yield farmers will sometimes move their funds in between protocols or swap coins for something they believe may generate more of a yield. A simpler way to discuss yield farming might be to compare it with traditional finance. For example, suppose you want a new savings account that offers the highest annualized percentage yield. You would compare the accounts and see which will give you the very best return on your money across different products. The returns of different yield farming strategies can be revealed in the exact same method.
Users are getting money simply by using their preferred DeFi projects. But yield farming isn’t simply free money – users need to be knowledgeable about the risks on the farm.