» What Is Yield Farming? And How to Get Rich from Yield Farming?

What Is Yield Farming? And How to Get Rich from Yield Farming?

By Milko Trajcevski
— April 29, 2022
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Yield farming is currently the most significant growth driver of Decentralized Finance (DeFi), an emerging financial technology that aims to remove Intermediaries and government interference in financial transactions.

While DeFi has opened up multiple income streams for investors in the crypto industry, Yield Farming is the biggest of all. The steady growth of Yield Farming protocols has helped the DeFi sector grow from a market cap of $500 million in 2020 to over $200 billion in 2022.

Yield Farming

The boom experienced in the Yield Farming sector can be traced to the launch of the COMP token – the governance token of the Compound Finance ecosystem. This token allows holders to take part in the governance of the project. 

In return for participation, these governance token holders are rewarded with incentives, often in crypto. In this article, we will discuss the concept of yield farming and how you can make money using yield farming through staking.

What is Yield Farming?

Yield farming is one of the new concepts that has emerged in the cryptoverse, allowing anyone to earn passive income using the decentralized ecosystem built on Ethereum.

Yield Farming is the practice of staking or lending cryptocurrency and other digital assets to generate interests or rewards in the form of additional crypto. 

It is simply the way of making more crypto with the crypto at hand by lending it to others, and you earn fees in the form of crypto in return for your service.

How Does Yield Farming Work?

Yield farming has become popular as it allows people to earn passive income, similar to but more productive than saving some money in a bank for a particular period (fixed deposit accounts) to get back some interest. 

In the case of Yield Farming, investors who deposit their cryptocurrency to run the DeFi platform are called Liquidity Providers (LPs). 

They provide some amount of coin or token to a liquidity pool known to be a smart-based decentralized application (dApp) which contains all the funds contributed. Immediately the LP locks tokens into a liquidity fund.

Liquidity providers are rewarded with the fees or interest from the underlying DeFi platform while the Liquidity pool runs. This is typically related to the Automated Market Maker’s (AMM) model. 

The funds deposited in the pool are majorly stable coins. The most common stable coins used in Decentralized finance are USDT, DAI, USDC, BUSD, and much more.

How to Make Money Off Yield Farming?

Unlike banks that promise 0.01% to 0.25% a year, yield farming lenders can earn between 15.30%, and some DeFi protocols tout up to 200%earnings. 

To make stablecoin deposits easy and faster, different kinds of DeFi platforms can be used in lending to optimize the return on the stake coin. These platforms are called yield-farming protocols. 

Each of these protocols has its own defined incentives that are different from one another to attract more investors. Hence, the investors pick the best with a good incentive through a reputable exchange such as Binance

We also have other protocols like AAVE, Compound, Course Finance, and Instadapp. Yield farmers mostly move their funds between different protocols to get a higher yield, and that’s why that platform provides other Reasonable incentives to attract more capital to their platform.

Make Money Off Yield Farming

There are other ways Yield Farming works, in which the investors are allowed to borrow coins and make use of collateral to stand for the coin. This collateral must be much higher in value than the coin borrowed. 

Every protocol platform does have its collateral ratio in which the borrower’s collateral must fall within, and if it falls below the set ratio of the protocol borrowed from, the collateral may liquidate. If action is not taken quickly, the borrower might stand the risk of losing the collateral. 

Hence, the borrower must keep his eyes on the collateralization ratio to add more collateral to that which is on the ground if the value is going down below the collateralization ratio.

With successful borrowing, the borrower invests it on a big project that would yield more income or add it to the staking on the ground already to increase the interest or reward that would be gained on the investment. 

At the end of the investment, the investor would get back his capital which would be used to pay back the coin borrowed, and he would be left with much more crypto, which is big money to him.

How to calculate yield farming?

The estimated yield farming returns are calculated annually, and the common metrics being used are Annual Percentage Yield (APY) and Annual Percentage Rate (APR). 

There is just a little difference between them: APY takes into account the effect of compounding while APR does not. Compounding in this sense means directly putting back the profit gained to the investment to generate more return.

The Risk of Yield Farming

Yield Farming is generally considered to be safer than crypto staking, but there are different risks associated with the process. These risks are not common and often involve hacks and fraud based on the vulnerability of the protocols. 

Investors should always be careful of the protocol being used because many of the Liquidity pools are scams that end in “rug pulling,” The developers withdraw all liquidity from the pool and run away with the funds. Hence, Lenders and Borrowers are advised to conduct proper research on any protocol.

In a Nutshell

Yield Farming has proven to be an attractive way of earning crypto, especially for those interested in generating passive income with their portfolio. However, to succeed in Yield farming, you have to use the right Protocol platform on a trusted exchange like Binance and be sure of returns on your crypto holding.

Yield Farming is the practice of staking or lending cryptocurrency and other digital assets to generate interests or rewards in the form of additional crypto. 

It is simply the way of making more crypto with the crypto at hand by lending it to others, and you earn fees in the form of crypto in return for your service.

How Does Yield Farming Work?

Yield farming has become popular as it allows people to earn passive income, similar to but more productive than saving some money in a bank for a particular period (fixed deposit accounts) to get back some interest. 

In the case of Yield Farming, investors who deposit their cryptocurrency to run the DeFi platform are called Liquidity Providers (LPs). 

They provide some amount of coin or token to a liquidity pool known to be a smart-based decentralized application (dApp) which contains all the funds contributed. Immediately the LP locks tokens into a liquidity fund.

Liquidity providers are rewarded with the fees or interest from the underlying DeFi platform while the Liquidity pool runs. This is typically related to the Automated Market Maker’s (AMM) model. 

The funds deposited in the pool are majorly stable coins. The most common stable coins used in Decentralized finance are USDT, DAI, USDC, BUSD, and much more.

How to Make Money Off Yield Farming?

Unlike banks that promise 0.01% to 0.25% a year, yield farming lenders can earn between 15.30%, and some DeFi protocols tout up to 200%earnings. 

To make stablecoin deposits easy and faster, different kinds of DeFi platforms can be used in lending to optimize the return on the stake coin. These platforms are called yield-farming protocols. 

Each of these protocols has its own defined incentives that are different from one another to attract more investors. Hence, the investors pick the best with a good incentive through a reputable exchange such as Binance

We also have other protocols like AAVE, Compound, Course Finance, and Instadapp. Yield farmers mostly move their funds between different protocols to get a higher yield, and that’s why that platform provides other Reasonable incentives to attract more capital to their platform.

2 Comments
  1. Cheapest Digital Books

    Hi there, I enjoy reading through your article. I like to write a little comment to
    support you.

    Reply
    • thedigitalsweep

      Thank you for your support and for the feedback, it is much appreciated!

      Reply

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