• News
    • Latest News
    • Press Releases
  • Markets
  • Articles
    • Opinion
    • Explainers
    • Guest Posts
    • Sponsored Posts
  • Policy
  • Videos
  • Podcasts
  • Learn
    • DeFi Basics
    • Blockchain Fundamentals
    • Tutorials
    • Reviews
  • Research
    • Case Studies
  • Explore
    • NFTs
    • DAOs
    • Crypto Gaming
    • Metaverses
    • Web3
    • Stablecoins
    • CBDCs
    • DeFi
  • Markets Pro
    • Swap Crypto
    • DeFi Planet Pro
    • Coin Prices
    • Crypto Exchanges
    • Crypto Analyzer
No Result
View All Result
DeFi Planet
  • News
    • Latest News
    • Press Releases
  • Markets
  • Articles
    • Opinion
    • Explainers
    • Guest Posts
    • Sponsored Posts
  • Policy
  • Videos
  • Podcasts
  • Learn
    • DeFi Basics
    • Blockchain Fundamentals
    • Tutorials
    • Reviews
  • Research
    • Case Studies
  • Explore
    • NFTs
    • DAOs
    • Crypto Gaming
    • Metaverses
    • Web3
    • Stablecoins
    • CBDCs
    • DeFi
  • Markets Pro
    • Swap Crypto
    • DeFi Planet Pro
    • Coin Prices
    • Crypto Exchanges
    • Crypto Analyzer
No Result
View All Result
DeFi Planet
No Result
View All Result
Home Articles

A-Z Of Yield Farming In DeFi

3 August 2021
in Articles, DeFi, DeFi Basics
Reading Time: 7 mins read
112 7
Yield Farming In DeFi | DeFi Planet

Contents

  • What Is Yield Farming?
    • How did it start?
    • How does it work?
      •     1. Liquidity Mining
    •     2. Leverage
    •     3. Risks
  • Yield Farming Strategies
    •     1. Lending & Borrowing
    •     2. Supplying Capital To Liquidity Pools
    •     3. Staking LP Tokens
  • Yield Farming Risks
  • In Conclusion…

Last updated on July 11th, 2023 at 10:34 pm

Yield farming is one of the most trending topics in the world of DeFi. While the DeFi summer is known for the surging prices of DeFi tokens, it is yield farming that provides the most value in the DeFi ecosystem. 
As an investor, your main goal is always to look for opportunities to maximize returns on your capital. Yield farming allows you to do just that. 

When you follow a yield farming strategy, you are rightly chasing the highest yield amongst different DeFi protocols. Moreover, investors continuously switch between different platforms and go wherever the highest APY is being offered. When it comes to comparing yield farming returns with traditional yield strategies, there is absolutely no comparison. Traditional savings accounts have an APY ranging from 0.1%-3% with 3% being almost unheard of. In comparison, yield farming offers investment opportunities when you can get as much as 100% APY. There have been stories of DeFi natives making the most of market irregularities to earn 1000% APY on their capital.

In this article, you will learn about yield farming, some strategies, and risks associated with yield farming.

Let’s go…

What Is Yield Farming?

Simply put, yield farming is a way for you to make more crypto with your crypto. It is a way of maximizing your return on capital by leveraging different financial products across the DeFi ecosystem. The process of yield farming involves locking up cryptocurrencies on different DeFi platforms and getting rewards for the same. Yield farming is a high-risk, high-return investment opportunity. Through yield farming, investors seek to achieve double or even triple-figure returns on their investment. 

How did it start?

We believe that the concept of yield farming gained popularity with the launch of the COMP token. COMP token is the governance token of the Compound protocol, one of the most used lending protocols in the DeFi ecosystem. While Compound did not invent yield farming, it introduced a token-based distribution model in DeFi. For example, COMP token holders were given governance rights on the platform. To decentralize the network, these tokens were distributed algorithmically, with liquidity incentives. This motivated liquidity providers to “farm” the new COMP token and provide liquidity to the protocol. Since then, many DeFi projects have used similar programs to attract yield farms to boost liquidity on their platform.

How does it work?

In DeFi, three main elements make such high returns possible. They are:

    1. Liquidity Mining

Through liquidity mining, yield farmers can earn higher yields. This is because liquidity mining provides additional incentives for yield farms in the form of token rewards. 

For providing liquidity to a specific protocol, yield farmers can earn token rewards. This works similar to the example of Compound shared above. 

To make higher returns, yield farmers are even ready to take a loss on their initial capital if it enables them to get more rewards in the form of distributed tokens. 

Synthetix was one of the first DeFi protocols to introduce the concept of liquidity mining. It rewarded users who helped the protocol by adding liquidity to the sETH/ETH pool on Uniswap with SNX tokens.

    2. Leverage

Leverage is another way of earning high returns in DeFi. It is a strategy of borrowing money from different protocols and using it to increase the potential of returns on investment. In yield farming, farmers deposit their crypto as collateral on one of the lending protocols. In return, they are allowed to borrow other coins in a specified ratio. Using these borrowed coins as collateral, yield farmers can borrow even more crypto. By repeating this process many times, yield farmers can leverage their capital to generate higher returns on their initial investment. 

    3. Risks

Yield farming is a high-risk high-reward investment strategy. Farmers are willing to take high risks in the quest to achieve high returns. We will discuss yield farming risks in more detail later in the article.

Yield Farming Strategies

To achieve high returns, yield farmers use complicated strategies that involve the active movement of capital. Yield farmers move their capital around from one lending platform to another, looking for the liquidity pool offering the highest APY. Currently, the yield farming strategies mostly involve and revolve around the following elements:

    1. Lending & Borrowing

Lending and borrowing capital is one of the simplest strategies to earn a return on your capital. Yield farmers supply their crypto on one of the lending platforms and start getting a return for their capital investment. This comes with a risk of potential liquidations in the liquidity pools. For example, Aave is a decentralizing lending and borrowing protocol that is used by most yield farmers. On Aave, interest rates are adjusted algorithmically depending on the market conditions. When farmers lend funds to Aave, they receive, aTokens. Using these tokens, lenders can earn and compound their interest upon depositing. Moreover, Aave offers many other advanced features to users such as flash loans. 

Yearn Finance is an aggregator of lending protocols such as Aave, Compound, Maker, and others. It allows farmers to automatically choose the best lending and borrowing strategy for them.

    2. Supplying Capital To Liquidity Pools

Yield farmers can earn fees on liquidity protocols by supplying crypto to one of the liquidity pools. Decentralized exchanges like Uniswap, SushiSwap, Balancer, and Curve are some of the most popular platforms used by yield farmers. For example, yield farmers can supply tokens to a specific liquidity pool on Balancer and earn fees. In addition to fees, Balancer also provides liquidity mining benefits to yield farmers in the form of extra BAL tokens increasing their APY.

    3. Staking LP Tokens

Many protocols offer incentives to yield farmers to stake their LP tokens that represent their participation in a specific liquidity pool. This enables yield farmers to maximize their returns. For example, yield farmers can provide wBTC, sBTC, and renBTC to the Curve-BTC liquidity pool and in return, receive Curve LP tokens as a reward for participation. This partnership between Synthetix, REN, and Curve allows yield farmers to stake their Curve LP tokens on Synthetix Mintr and be rewarded in CRV, BAL, SNX, and REN tokens. 

In yield farming, farmers need to stay active and keep an eye on the trending strategies. Strategies can become obsolete very quickly. This is because something very profitable right now, may not offer the same returns in the future. Or, another protocol will come up that offers much higher returns.

It has been seen that yield farmers use a combination of all the strategies to maximize their returns.

Yield Farming Risks

Yield farming isn’t as easy as it sounds. The strategies mentioned above are quite complex to execute in the marketplace. Moreover, there are many risks associated with yield farming. Let’s take a look at some of them in more detail:

  • Smart Contract Risk – Smart contracts are essentially just lines of code and no code is perfect. As a result, there is a risk of bugs in smart contracts.
  • Leverage – When things are going well, leverage can help yield farmers gain tremendous returns. However, when leverage also over-exposes yield farmers and increases the risk potential of the investment. 
  • Liquidation Risk – Since farmers use leverage to take loans, the loans are overcollateralized. As a result, the collateral that is supplied is at the risk of being liquidated in case the collateralization ratio drops below the threshold.
  • Impermanent Loss Risk – In cases when there are sharp price movements, the risk of impermanent loss increases tremendously. Impermanent loss takes place due to the arbitrageurs taking advantage of the market inefficiencies caused due to the algorithmically driven token rebalancing formula of AMMs
  • Systematic Risks – The inherent risks associated with the DeFi ecosystem are ever-present. 
  • DeFi specific attacks – Some risks are unique to DeFi. For example, attacks aimed at draining liquidity of specific liquidity pools. 

 

In Conclusion…

Yield farming is still a relatively new concept in DeFi. It is far from being an efficient market.  There are many opportunities for investors to make tremendous returns on their investments. However, this prospect of high returns comes with its own set of risks and anyone looking to participate in the world of yield farming should be aware of them.

  • At the moment, yield farming can be too technical for new investors in DeFi. But, there are many protocols like Yearn Finance that make it easier. 
  • Furthermore, we can expect many new applications in the future that help investors earn with yield farming. 
  • The goal of investing is to maximize returns. Why keep your assets idle when you can put them to work while you HODL? 
  • Dare to DeFi and earn passive income with yield farming.

So, have you tried yield farming yet? If so, what’s your favorite yield farming strategy? 

Comment down below and let us know.

 

If you would like to read more articles like this, follow DeFi Planet on Twitter and LinkedIn.

Don't miss out!

Subscribe To Our Newsletter

Receive top education news, lesson ideas, teaching tips and more!
Invalid email address
Give it a try. You can unsubscribe at any time.
Thanks for subscribing!
Tags: DeFiDeFimarket
Share69Tweet43Share12
Previous Post

DeFi Is Eating TradFi

Next Post

What Is The Cardano Blockchain: All You Need To Know

Arjun Chand

Arjun Chand

Dare to DeFi #ygmi

Related Posts

Discover the Best Decentralized Oracle Solutions for 2023
Articles

Discover the Best Decentralized Oracle Solutions for 2023

19 September 2023

Blockchain technology was not designed to function in isolation from the larger economy. While cryptocurrencies have disrupted traditional finance, supply chain logistics, and several other industries in many ways, the potential use cases for blockchain would be severely limited...

Web3 in Music: Innovations Reshaping the Music Industry
Articles

Web3 in Music: Innovations Reshaping the Music Industry

18 September 2023

In 2021, the musician 3LAU earned nearly $12 million in just one day by selling his first NFT album to fans. During the same year, artist Don Diablo sold an NFT of his concert for $1.2 million. These earnings...

Web3 Betting: The Future of Gambling on the Blockchain
Articles

Web3 Betting: The Future of Gambling on the Blockchain

18 September 2023

The rise of the decentralized web often referred to as Web3, has made a big impact on different industries and how we use digital services. Web3 aims to give individuals more control by creating decentralized platforms that remove the...

Understanding How The Actions Of Crypto Whales Impact Cryptocurrency Markets
Articles

Understanding How The Actions Of Crypto Whales Impact Cryptocurrency Markets

18 September 2023

Cryptocurrencies have undeniably revolutionized the world of finance, offering a decentralized alternative to traditional banking systems. However, the notion of decentralization doesn't necessarily equate to immunity from manipulation. In fact, judging from the current climate, it's quite the opposite....

Swap Crypto

Markets Update

PayPal USD Stablecoin: A Win For Ethereum Or A Return to Centralization?

1 month ago

Worldcoin (WLD) Price Surges on Launch, But Privacy Concerns Issues Cast Doubts

2 months ago

XRP Skyrockets as Ripple Scores Partial Victory In SEC Battle; What Next for US Crypto Regulation?

2 months ago

Bitcoin May Be on a Bullish Trend As Price Approaches the $26,800 Key Support Level

4 months ago

DOGE Hits $10B Market Cap; Community Criticizes New Twitter CEO Appointment

4 months ago

NFT Market in Q1 2023: A Tale of Strong Starts, Mixed Performances, and Shifting Market Dynamics

4 months ago
Read More

Spotlight

All about SolChicks

All about Algorand

All about Bitcoin

All about Goracle

Press Releases

Gora Network Launches Testnet on Arbitrum

Gora Network Launches Testnet on Arbitrum

byGuest Author
13 August 2023
0

...

Blockswap to Host Multichain ERC20 Side Event at ETHCC

Blockswap to Host Multichain ERC20 Side Event at ETHCC

byGuest Author
8 July 2023
0

...

Goracle’s $GORA Initial DEX Offering Is Live on DeFi planet

Goracle’s $GORA Initial DEX Offering Is Live!

byGuest Author
28 June 2023
0

...

BitMEX Introduces a New PnL Realisation Feature for More Capital-Efficient Cross-Margining

BitMEX Introduces a New PnL Realization Feature

byGuest Author
13 April 2023
0

...

BitMEX Joins TRUST Protocol to Expand Travel Rule Compliance Capabilities, Aims to Adapt Swiftly in an Evolving Landscape

BitMEX Joins TRUST Protocol to Expand Travel Rule Compliance Capabilities

byGuest Author
13 April 2023
0

...

Read More
  • About Us
  • The Team
  • Careers
  • Contact
  • Partnerships

© Copyright 2023 DeFi Planet   |   Terms & Conditions   |   Privacy Policy

No Result
View All Result
  • News
    • Latest News
    • Press Releases
  • Markets
  • Articles
    • Opinion
    • Explainers
    • Guest Posts
    • Sponsored Posts
  • Policy
  • Videos
  • Podcasts
  • Learn
    • DeFi Basics
    • Blockchain Fundamentals
    • Tutorials
    • Reviews
  • Research
    • Case Studies
  • Explore
    • NFTs
    • DAOs
    • Crypto Gaming
    • Metaverses
    • Web3
    • Stablecoins
    • CBDCs
    • DeFi
  • Markets Pro
    • Swap Crypto
    • DeFi Planet Pro
    • Coin Prices
    • Crypto Exchanges
    • Crypto Analyzer

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In
Please enter and activate your license key for Cryptocurrency Widgets PRO plugin for unrestricted and full access of all premium features.

Add New Playlist

Are you sure want to unlock this post?
Unlock left : 0
Are you sure want to cancel subscription?
-
00:00
00:00

Queue

Update Required Flash plugin
-
00:00
00:00