One of the recent and hottest news in Cryptocurrency is yield farming, a reward measure taken by the Defi (decentralized finance) world market by storm in 2020. It is mostly a significant reason some people are interested in the Defi world. And it has witnessed inexperienced investors lost fortunes while tech-savvy capitalists make big money. Like things similar to Cryptocurrency and blockchain, Yield farming permits cryptocurrency holders to hold their holdings that would later offer them rewards.
This guide, however, offers a breakdown of the main topics on yield farming. Investors would be in a great view to choose if to pursue it in more depth.
What is Yield Farming?
Yield farming is a procedure that permits cryptocurrency holders to hold their holdings that would later offer them rewards. Specifically, it allows you to earn variable or fixed interest by investing in Cryptocurrency in Defi markets.
It means lending Cryptocurrency through Ethereum networks. If loans are done through banks with fiat money, the lent amount would be paid back with interest. The concept is the same with yield farming; Cryptocurrency, which otherwise will be staying in exchanges or wallets, is lent through Defi protocols to have a return. Normally, Yield farming is carried out with ERC-20 tokens in Ethereum, with a reward coming in ERC-20 token form. While it may change soon, nearly all present yield farming processes occur in an Ethereum ecosystem.
How Does Yield Farming Work?
The first thing in yield farming is putting funds into liquidity pools, which are vitally smart contracts. The pools do power marketplaces where customers could exchange, lend or borrow tokens. After adding your funds to the pool, you will become a provider of liquidity officially.
In return for locking your pool funds, you would be rewarded and given money derived from underlying DeFi’s platform. It is vital to know that ETH investment doesn’t posit yield farming. Rather, lending ETH in decentralized non-custodial market protocols, such as Aave, then getting a reward, is seen as yield farming. The reward token itself can equally be deposited in a liquidity pool, and it is a known practice for individuals to shift their money between diverse protocols in order to pursue higher yields. It’s complex; yield farmers are normally vast with Ethereum networks and technicalities. They do move their funds to diverse Defi platforms to receive the best returns.
It isn’t simple and certainly not easy money. People offering pro-liquidity are rewarded according to the liquidity provided amount; thus, those receiving big rewards get correspondingly big amounts of funds behind them.
The Main Benefits Yield Farming?
The major Yield Farming benefit is the sweet profit. Presently, yield farming could offer more profitable interest than traditional banks. However, there are some risks involved. The interest rates could be volatile; thus, making it difficult to predict how your rewards can look over the near years. What’s more, according to many analysts, Defi is a riskier area to put your money.
Should People Care about Yield Farming?
In most of 2020, huge money has been lost and made through Ethereum networks due to yield farming platforms are made on Ethereum. Almost or all DeFi tools utilizes Ethereum platforms. The rise of its popularity explains the extent to which financial revolutions promised through Defi relies on Ethereum.
Yield farming is essential because it helps the project has initial liquidity; however, it’s equally vital for borrowers and lenders. It makes the activities of taking loans simpler for everyone. People making big returns do get enough funds behind them. However, those attempting to take loans have clear access to Cryptocurrency with low-interest rates, often low at 1 per cent APR. Borrowers as well can lock their funds in high-interest accounts easily. Although the yield farming rise has slowed somewhat after the 2020 summer boom, still there is a chance of receiving outsized yields on assets when compared to the traditional finance world.
In concluding this section, it’s important to state that Yield farming is a divisive talk in the cryptocurrency world. Not everyone or communities think it’s crucial, while some in crypto communities have advised others not to get involved. For instance, flash farms, recent yield farming projects have been heavily criticized by Ethereum developers following their high risks. Practically, Vitalik Buterin, Ethereum co-founder, said he wouldn’t invest in yield farming.
Which Projects are Involved in Yield Farming?
A set of Defi projects are presently engaged in yield farming. The recent biggest one in value aspect locked in a smart contract is known as Aave, a project permitting customers to borrow and lend a set of cryptocurrencies.
The next one is Yearn. finance. This move customer’s funds between diverse liquidity and lending protocols to have excellent interest rates.
And there is Compound, a Defi platform that permits individuals to earn funds on the Cryptocurrency they save. They started to Yield farming from scratch and has a beginner-friendly guide.
Who Gets Involved in Yield Farming?
Becoming engaged in yield farming is a bit tricky when you don’t have previous experience in Cryptocurrency. Projects like Yearn.finance and Compound are attempting to make lending and borrowing accessible to everyone. But since yield farming has influenced high gas costs on Ethereum networks, people making big returns via lending their Cryptocurrency have enough capital and funds behind them to begin.
What Can you Do with Yield Farming?
Best yield farmers have received much as 100 per cent APR on some popular stable-coins, with a host of diverse strategies. A strategy involves a world popular Defi platform called Compound. This platform rewards people or investors COMP tokens for capital borrowing and supplying, and several customers maximize their returns by engaging them both. Borrowing capital on Compound offers COMP Token in cashback form. The more COMP Token is offered, the more you borrow. When the cashback worths more than borrowing fees costs, you could continue borrowing in order to farm cashback rewards.
Since liquidity miners are dully compensated for borrowing and lending, one strategy is for lending the biggest interest rate assets, borrow more you can against tokens, then returning the lasting assets to lending pools.
The potential final result is 100 per cent APY rather than 0.01%-1.00 per cent many banks provide, which is a fair increase.
Is Yield Farming Sustainable?
Some yield farming projects might not last long and can’t be sustainable. The projects sometimes raise big money in short periods and then are forgotten. Some analysts, including Ethereum developers, have described some projects as scams, particularly flash farming projects. More so, other yield farming projects have engaged unaudited and experimental codes that have caused unintended consequences.
However, Defi yield farming platforms, like the ones mentioned above, might last long. Probably, the same amounts of money might not be made on them later on in years, but would surely transform the aspect of loans.
How to Start Yeld Farming
To be a yield farmer, you should just put rewarding cryptocurrency assets or deposit interest to a DeFi protocol. Here is the right guide to begin yield farming:
- Purchase ETH, BTC, DAI, USDT, or USDC. They are the generally acceptable cryptocurrencies for getting yield on many DeFi protocols. Note that you must buy ETH.
- Next is to download the MetaMask Wallet browser extension. When you are done, create your wallet and backup the keys.
- After the ERC-20 tokens are securely inside the MetaMask wallet; you are now ready to begin interacting on Defi platforms and start yield farming. For ease, it’s advisable to learn yield farming with Compound Finance because it’s a beginner-friendly platform.
- After, go to Compound and click the button of the App on the right-hand side.
- After clicking, you should connect your wallet. Click on the option of MetaMask and sign in to MetaMask.
- Choose the asset you wish to supply inside the landing page supply side. Select your preferred amount you wish to provide, and click supply.
- MetaMask will bring out a pop-up message requesting you to confirm the two transactions.
- When the transaction is confirmed, the Compound app would tell you all is okay. You will then see your balance columns with your supplied amount.
- To improve your potential in yield farm, borrow against your supplied assets to make more distribution while lending the assets to Compound or other Defi platforms.
The Future of Yield Farming
It’s typically not possible to predict the future accurately in this volatile and fast-paced space. The overall consensus is that the profitable bubble might burst at some time. The present levels of expectation and hype can potentially put many strains on networks and create congestion problems. Any outcome price corrections can make some farmers unable to liquidate assets that can affect yield farming general confidence.
Presently, yield farming is still a high-reward and high-risk practice that may be worth doing provided that necessary risk assessments and researches have been executed in advance.
This breakdown gives a guide to key and important topics under yield farming. After going through it, you would be in a great position to choose if to pursue yield farming in more and further depth.