The cryptocurrency world is always buzzing with several options on how to make money, and yield farming is yet another that promises massive returns. If you’re a Decentralized Finance (DeFi) systems enthusiast, then you must have encountered “yield farming” a couple of times.
With the booming expectations in the DeFi space right now , let’s have a look at what you need to know about yield farming and some of its high-flying platforms to explore.
Yield Farming – What is it about?
Yield farming (or liquidity harvesting) is a creative and well-managed process that productively put crypto tokens to use in a DeFi market, and also offer investors (better known as liquidity providers) the freedom to switch in-between protocols to maximize ROI.
Simply put, consider yield farming as similar to depositing liquidity in traditional banks to facilitate loans with the aim of getting returns. However, in this case, cryptocurrency is the central entity.
Yield farming became popular after the breakout of Compound (COMP) governance token. It is facilitated by ERC-20 tokens on the Ethereum blockchain, and it offers a means to passively earn some income.
The returns on yield farming are only enticing for liquidity providers if the coin in question experiences rapid and significant appreciation.
So How Exactly Does Yield Farming Work
The basic approach here is lending cryptocurrency to speculative borrowers through decentralized applications (dapps) such as Compound, a leading player in the DeFi space.
The obtainable interest from lending is largely dependent on market demand, but for every time you engage the services of Compound, you’ll receive Comp coins together with interest and other charges. As already established, if the value of Comp token appreciates significantly, returns also skyrocket.
Apart from Compound, other platforms in the liquidity harvesting space are Curve, Uniswap, Synthetix, Ren, etc. At the moment, these entities hold billions of dollars in aggregate liquidity known as total value locked (TLV).
The higher the TLV, the more yield farming can occur. Additionally, yield farmers are allowed to actively participate in the development and governance of these platforms. Contrasted, these farmers are mostly speculators who just want to earn massive APR using the “move it here and there” strategy, as symptomatic of crypto trading.
Yield Farming Associated Risks – Are There Any?
Just like the farmlands of actual farmers can be ruined by pests, rodents and harsh climatic changes, yield farming is not risk-free. The headline risks in yield farming originate from price oracles, smart contracts, exchange rates, governance practices, etc.
The good and the bad is the permissionless and interdependent nature of DeFi protocols. This poses a problem when an entity goes sub-optimal or runs into operational crisis, and the entire ecosystem takes the impact.
Top 3 Platforms to Explore
Yield farming strategies are not static, and each platform has its rules and associated risks. Here are the top three most popular platforms to explore:
This platform is an algorithmic financial market that thrives on the exchange of assets between lenders and borrowers. An Ethereum wallet is all that’s required to become a liquidity provider (LP) on Compound and begin to earn amazing rewards. The reward rates are constantly adjusted by algorithmic protocols to reflect the realities of market demand and supply.
Compound is an integral entity of the yield farming network and its worth exploring.
Curve is a decentralized asset exchange pool on the Ethereum blockchain that’s specifically designed to enhance the trading of stablecoin. Unlike other DeFi platforms, Curve offers low slippage and high-value stablecoin exchange.
The yield farming stage has enjoyed an abundance of stablecoins, thereby making Curve an integral part of its architecture.
Uniswap is another popular – yield farming – platform to explore. It facilitates the trustless and rapid exchange of crypto assets through its decentralized protocol. Here, (liquidity pools)LPs create a marketplace by depositing the equivalent value of a market pair of any token.
The above creates a liquidity pool for traders to leverage on, and in return for LPs, they earn rewards for the trade volume they generate. The trustless and frictionless nature of the Uniswap platform can come in really handy for yield farmers.
What’s in the Future for Yield Farming?
Since the advent of the Compound token, the DeFi space has continued to experience a new wave of thinking. However, negative spikes cannot be ruled out in the future. The good news is, yield farming is still in its infancy, and as it becomes more robust, stakeholders will invent new projects and protocols to enhance liquidity incentives.
Although a risky place to invest your liquidity, yield farming is moving fast and offers huge interest rates, and this could continue.