🌌DeFi yield farming is a way to receive cryptocurrency using the cryptocurrency you already possess. This format resembles traditional centralized finance: you lend your money, in our case, cryptocurrency, to other users and earn crypto rewards in return.
This unique innovation in decentralized markets enables anybody with Internet access and a crypto wallet to earn crypto rewards.
🟣How it works
A user places cryptocurrency in a liquidity pool on a particular platform, becoming a liquidity provider, and receives rewards.
💫A liquidity pool or smart contract is a place for funds storage.
Rewards are either received in the form of fees or distributed among liquidity providers from a particular volume of particular tokens.
✨Sometimes liquidity providers can receive so-called LP tokens and use them to generate income further, for example, staking.
Farmers are aimed to maximize profits, so they consider profitable strategies and move their assets to different smart contracts.
💙The yield farming boom began with the launch of the Comp token, the governance token of the Compound Finance ecosystem. Governance token enables its holders to manage the ecosystem of the project. Governance tokens were distributed among liquidity providers using an algorithmic method. This ensured the decentralization of the network and attracted liquidity providers.
Curve, a liquidity aggregator offering low-slippage trades between similar assets such as stablecoins or Ethereum-based tokenized BTC, began attracting farmers much earlier.
Things to pay attention to when adding liquidity:
💎APR — annual percentage rate.
💎APY — annual percentage yield.
💎TVL — total value locked, showing the liquidity of pools. The higher the TVL, the higher the yield.
Here are some popular and robust platforms that provide farming opportunities:
💜Compound Finance is an algorithmic money market that allows users to lend and borrow. Any user with an Ethereum wallet can put assets in the Compound liquidity pool and receive rewards. Rates are adjusted automatically depending on supply and demand.
🟣Uniswap is a decentralized exchange that allows a trustless token exchange. To create a market, liquidity providers input the equivalent value of two tokens, after which traders can trade against this pool of liquidity. Liquidity providers receive commissions from their pool.
🔵Balancer is a liquidity protocol similar to Uniswap, with the difference that the platform allows customizing the allocation of tokens in the pool. This allows liquidity providers to create their own pools. Providers also receive a commission for transactions that take place in their liquidity pool.
🟢MakerDAO is a decentralized lending platform that pioneered the DAI stablecoin development, algorithmically pegged to the US dollar rate. Anyone can open the vault and lock ETH, BAT, USDC, or WBTC in it. Then, as debt on the locked provision, users can generate DAI. After a while, interest is accrued as a stability commission.
🔴It is important to note that profitable farming bears some risks. First of all, it is a rather complicated way to make money, which only experienced users with large capital can handle. So be careful, if you are a beginner, you risk losing money at once.
The second risk factor is the safety of funds. Smart contracts can contain bugs and be vulnerable to hackers attacks. Even large and trustworthy platforms are susceptible to hacking. So you should pay attention to the results of smart contracts audits before making any decision on working with them.
🔹Another risk aspect is the high fees in the Ethereum network, which can make farming operations unprofitable.
Withdrawing funds from liquidity pools. Any user of the DeFi platform can withdraw their liquidity from the market, except in those scenarios when a third-party mechanism locks it. Besides, developers control large amounts of underlying assets in most cases and can easily dump these tokens on the market.
Have a large harvest!🚀