The emerging advancements in the world of crypto have created many new opportunities while leaving beginners in awe. If you want to navigate the crypto world, then you should be familiar with the newly arriving buzzwords and trends. Many people don’t have a clear idea of how crypto can offer promising ways of earning value with their crypto assets. This is where you could find the continuously rising popularity of yield farming making formidable highlights in the present times.
The growth of decentralized finance or DeFi is also showing favourable implications for yield farming in the crypto sphere. Are you excited to learn about the “yield” with the crypto and how you can farm it? The following discussion offers you a detailed overview of the concept of farming yield with crypto. You can learn how it works, what it offers you, and the risks involved with it.
What is Yield Farming?
DeFi apps are fledgling, and they need users to grow and actualize.
This year DeFi projects have been increasingly turning to yield farming. This process involves protocols distributing governance tokens to their users to bootstrap activity and reward the support of key early stakeholders.
Let’s take the example of the major DeFi borrowing and lending project Compound, which rolled out farming around its COMP governance token earlier last year. Compound distributed COMP retroactively to its past lenders and borrowers and offered ongoing COMP rewards to its current ones.
You could earn COMP — and thus a future says in Compound’s governance — just for using Compound. That’s yield farming in a nutshell.
How to Start Farming
To start yield farming, your checklist is pretty simple. You’ll only need:
- A Smart Chain (BEP-20) or Ethereum (ETH) address
- Some BNB (Smart Chain) or ETH to pay for transactions (gas fees)
And that’s all! Once you have your wallet and some gas fees prepared, you’ll be ready to move on to analyzing and identifying which yield farming opportunities are right for you.
What It Offers You (Finding Farming Opportunities)
New yield farming campaigns are popping up every day at this point. Figuring out which ones are worthwhile to take part in is half the battle.
The good news is that plenty of resources have recently popped up that make this process a lot easier. Some of these include:
- The yieldfarming.info site provides a curated list of yield farming opportunities and detailed wallet-based stats, such as your estimated annual percentage yield (APY) and more
- Crypto market data site Coingecko also has a new Farms page that hosts top yield farming opportunities and provides tools like an APY calculator, an impermanent loss calculator, and more.
Things To Consider: APY + Gas Prices
You won’t want to use or take part in a protocol to yield farming without having a general idea of what kind of APY you can expect for doing so. Some sites mentioned above are great for this. Here, here are a few other things to keep in mind:
- Yield farming projects will show APY stats for their pools on their own sites. These can be deceptive or confusing, so don’t take these stats as the last word.
- Pools with high APYs are high risk, high reward. Tread cautiously.
- APYs shift over time, as yield farming campaigns, typically have different distribution phases and so on. Be aware of how these distributions are set up and change (e.g. dwindling token rewards over 4 weeks).
Then another important consideration is gas. On Ethereum (or BNB Smart Chain), users have to pay a fee, or “gas,” to have their transactions processed.
Since Ethereum’s DeFi arena is currently booming, demand for Ethereum block space has never been higher and gas prices have skyrocketed accordingly.
That said, it can be really expensive to enter and exit yield farming positions lately. Make sure you’re considering these gas costs as you try to figure out which opportunities are most workable for you.
Types of Yield Farming
You can discover two distinct variants of yield farming with liquidity pool or LP farms and with staking farms. In the most basic sense, the farming opportunities in these variants focus on users having to deposit cryptocurrency in smart contracts. However, the difference is clear in the type of smart contract. A deeper insight into the yield generation of farming approaches could help in understanding yield farming comprehensively.
Liquidity Pool or LP Farms
With a liquidity pool farm, users have to deposit crypto assets in a smart contract that has been programmed to offer a liquidity pool. You can find the functionality of such pools similar to a decentralized trading pair involving two or multiple cryptocurrencies.
Trading is possible in the LP farms only with the cryptocurrencies offered by the liquidity providers. Decentralized finance or DeFi apps provide rewards to the liquidity providers with LP tokens in return for their deposits. The yield farming token could help in retrieving the deposits underlying the liquidity pool, along with the added interest to trade fees.
Stake farming is another yield generation approach that has been gaining the attention of investors. The approach involves a user depositing crypto assets in a smart contract that has been programmed to offer a staking pool. However, the staking pool is not similar to a decentralized trading pair. It is more like a decentralized vault for a specific type of asset.
The stake farming approach in yield farming does not offer the flexibility for trading and focuses on securing the deposits. The stake farms could facilitate a streamlined experience for users compared to liquidity pool farms. Stake farms only demand that users must deposit a single asset for earning passive income as compared to working in the role of a liquidity provider on a decentralized exchange. Subsequently, they also focus on staking the liquidity provider tokens.
Insurance mining focuses only on yield farms for rewarding users who have to deposit assets in the decentralized insurance funds. The decentralized insurance funds are highly risky as the successful insurance claims would be taken from them. Depositors in such type of yield generation could enjoy yield farming rates on the funds they put on the line for safeguarding projects.
You can find a simple example of such a system with a liquidity stability pool. Then, people would supply the LUSD stable coin in the pool as the backdrop for the lending protocol of Liquidity. Users receive the yield farming rewards as LQTY tokens, the native token of Liquidity.
The liquidity provided tokens are significant since DeFi apps operating liquidity mining programs establish staking interfaces to deposit the liquidity provider tokens. As a result, you can lock in your liquidity, followed by automatic and continuous governance token rewards for lock-in.
Yosh! We've concluded and would like to say a few things before ending this part. The perfect yield farm for each individual varies based on the amount of capital they have, their investment time horizon, and their desired level of risk.
However, if you are holding onto tokens, you can put them to good work and let them generate yield for you annually. If you are a beginner, it is also advisable that you diversify your portfolio as well for the best potential outcome.
Yield farming is a high-risk, high-reward strategy that can potentially lead to high returns, but remember that there are also risks such as impermanent loss because of the high volatility of the cryptocurrency market.
Remember to DYOR, and remain connected. 🍀🐼
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