The rise in the DeFi sector is likely to create an exciting new style of products and features that can be applied to the world of crypto. One of the most notable aspects of this sector can be yield farming. Unfortunately, according to Coin Market Cap, yield farming has become an enigma popularly discussed in the middle of 2020, the day before yesterday.
It is interesting to note that this strategy is even able to drive the growth of the DeFi area, which is very new. This strategy has contributed to DeFi growing its market capitalization from just US$500 million to US$10 billion by 2020. Wow! What a staggering number, isn’t it?
In the case of a central financial system, the Bank has the power to issue loans. Later, the Bank’s customers who borrowed the money will repay the loan and the interest to the Bank. In the reverse case, when customers save regularly or by depositing money or deposits, the Bank will offer the customers interest as a reward.
Learning about Yield Farming!
Yield farming is a method of locking or staking cryptocurrency through the offering of rewards. While the idea of getting the most from crypto investing isn’t new, the concept of yield farming comes from the idea of decentralized finance in general. Most often, the person who is staking earns tokens in exchange for participating within the DeFi program. Thus, yield farming could also be described as liquidity mining.
Instead of putting your money in a bank account and earning a small interest. This strategy is a great alternative with growing earnings in the form of cryptocurrency assets. In addition, this method of earning interest is an alternative to newcomers in the market for crypto assets who want to earn money passively more quickly.
How can you farm Bitcoin with Yield Farming?
Each platform has its particular features and procedures. This means that you must spend time understanding the functions of each platform, such as the lock duration and rate of return you are hoping to achieve. In general, you’re obliged to secure digital assets in smart contracts regarding yield farming.
Yield Farming utilizes the automated marketplace maker (AMM) and also includes Liquidity Pools (LP). This is in contrast to the notion of crypto exchanges, where traders generally buy and sell crypto assets for an agreed price; they can obtain an order for a limited position. Instead, liquidity Pools serve as cryptocurrency asset owners who put their funds into liquidity pools or Liquidity Groups.
The practice starts by providing users with a small portion of the transaction fee to help with liquidity for certain applications like Uniswap and Balancer. But, a typical yield farming system utilizes the DeFi program, and it earns the project’s tokens.
These Liquidity Pools serve as a marketplace or a place for users to borrow their funds or borrow them from another user or swap their assets for ERC-20 tokens.
Yield farmers typically use stablecoins like Dai and Tether (USDT) and USD Coins (USDC), as they are a quick way to earn gains and losses. However, it is also possible to grow yield with cryptocurrencies like Ether (ETH).
The Benefits of Yield Farming
This method of yield farming permits investors to get access to higher returns on investment, also known as ROI. Particularly if you’ve been a shareholder since the beginning, you could earn huge profits and gain interest as a result that tokens appreciate.
To allow that asset to rotate, the return will go back to the original DeFi project. In addition, specific liquidity pool platforms borrow the crypto asset from one to the next instantly.
Interoperability can boost profits and also provide a range of choices for financial services to several users. Certain professional investors are using this interoperability to make more money in the cryptocurrency world.
Risks from Yield Farming
Yield farming is a complex process and poses a significant financial risk for lenders and borrowers, and borrowers. Yield farming typically incurs significant Ethereum costs for gas and only works when the capital invested is in the thousands. As a result, users are at risk of fluctuations in prices and volatile losses when the market is volatile. CoinMarketCap offers a page of ranking yield farming, also known as a calculator for loss that is not permanent, allowing users to determine their risk.
What is striking regarding yield farming is that it is vulnerable to fraud and hacking because of weaknesses in smart contract technology. This flaw in programming often results from strong competition between protocols, where time is of the essence, and new features and contracts are not always audited and often copied from rivals or previous versions.
