If you want to raise the profits on your crypto investments, yield farming is one of many ways to earn more income. Yield farming is the activity of generating additional revenue on your crypto assets by using decentralized finance (DeFi) protocols.
This article will provide users with the definition of yield farming, the mechanism of yield farming, top yield farming crypto platforms and the risks of using yield farming to boost your cryptocurrency earnings.
What is Crypto Yield Farming?
Crypto Yield Farming is the practice of holding or lending your crypto assets in order to generate passive returns and earn rewards. Decentralized finance (DeFi) has recently gained popularity as a result of new features such as liquidity mining.
The Mechanism of Yield Farming
In the yield farming function, investors are able to earn returns by putting coins or tokens into a decentralized application (dApp). Examples of dApps include crypto wallets, DEXs, decentralized social media and more.
Yield farmers have a tendency to use decentralized exchanges (DEXs) for lending, borrowing or staking coins to earn revenue and speculate on price fluctuations. Yield farming across DeFi is assisted by smart contracts — pieces of code that automate financial agreements between two or more parties.
Types of Yield Farming:
- Liquidity provider: Users deposit two coins to a DEX to provide trading liquidity. Exchanges charge a small fee to swap the two tokens which are paid to liquidity providers. This charge is occasionally paid in new liquidity pool (LP) tokens.
- Lending: Coin or token holders can lend crypto to borrowers via a smart contract and get revenue from interest paid on the loan.
- Borrowing: Yield Farmers can use one token as security for another token loan. Users can then farm yield with the borrowed coins. In this way, the farmer saves their initial holding, which may grow in value over time, while also earning income on their borrowed coins.
- Staking: In the world of DeFi, there are two forms of staking. The main form is on proof-of-stake blockchains, where a user earns interest by pledging their tokens to the network to provide security. The second one is to stake LP tokens earned from supplying a DEX with liquidity. This enables users to earn revenue twice, as they are paid for supplying liquidity in LP tokens which they can then stake to earn more yield.
Calculating Yield Farming Earnings
Expected yield returns are frequently calculated annually. The expected returns are estimated over the course of a year.
There are two often-used measurements such as annual percentage rate (APR) and annual percentage yield (APY). APR does not account for compounding—reinvesting gains to generate larger returns—but APY does.
Still, most calculation models are simply estimates. It is tough to exactly calculate income on yield farming because it is a dynamic market. A yield farming strategy could yield high returns for a while, but farmers could always adopt it en masse, leading to a drop in profitability. The market is quite volatile and risky for both borrowers and lenders.
The Best Yield Farming Crypto Platforms for 2022 List
The yield farming cryptocurrency list below provides you with an overview of the top platforms on the market now for earning money with cryptocurrency.
- Curve Finance
Is Yield Farming Risky?
Risk yield farming carries several risks that investors should be aware of before getting started. In the DeFi yield farming aspect, frauds, hacks, and losses due to price swings are not uncommon. The first step for anyone interested in using DeFi is to research the most reliable and tested platforms.
Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.