Development in the DeFi sector is like to create the industry into a new era of products and features that could apply to the world of cryptocurrency custody. One of the best characteristics of this industry is yield-farming. According to Coin Market Cap, yield farming has become an enigma build-up popularity discuss in the middle of 2020, the day before yesterday.
It is interesting to note this strategy can drive the growth of the DeFi sector, which itself is very new. This strategy has contributed to DeFi increasing its market value from just US$500 million to US$10 billion by 2020. Wow! What a staggering number, isn’t it?
In the case of a central financial system where the Bank has the power to issue loans. Later, the Bank’s customers who borrowed the money will repay the loan and the interest to the Bank. In this case, where customers can save as they usually would or even by depositing money, the Bank will offer the customers interest as a reward. In a Decentralized Financial System (DeFi), this approach is used in this way, but with no intermediaries.
Understanding Yield Farming
Yield farming is by staking or locking a cryptocurrency through the offering of rewards. While the need to earn profits from investments isn’t new, the concept of yield farming comes from the concept of decentralized finance in general. It is usually when the stakeholder earns tokens for participating in the program. Yield farming could also be described as liquidity mining.
Instead of keeping your cash in a bank account and earning a small interest. This method is an attractive alternative with growing earnings in the form of cryptocurrency assets. In addition, this method of earning interest is an alternative to newcomers in the market for crypto assets that looking to earn money passively more quickly.
How can you farm Bitcoin with Yield Farming?
Each platform has its particular features and procedures. This means that you must spend time learning more about each platform’s specifics, such as the lock time and amount of profit you are hoping to achieve.
Yield Farming employs an automatic market maker (AMM) and incorporates Liquidity Pools (LP). Different from the notion of exchange based on crypto generally, traders buy and sell crypto assets for the price they want by taking a right to limit their position. Instead, liquidity Pools are owners of crypto assets who place their funds into liquidity pools or Liquidity Groups.
The practice starts by providing users with a small portion of the transaction fee to help with liquidity for certain applications, like Uniswap and Balancer. But, build a typical yield farming method uses the DeFi program, and it earns the project’s tokens.
The Liquidity Pools function as a marketplace or a place for users to borrow their funds or borrow them from another user or trade their assets in ERC-20 tokens.
Yield farmers typically use stablecoins like Dai and Tether (USDT) and USD Coins (USDC), as they are a quick way to earn gains and losses. However, it is also possible to increase yield by farming cryptocurrencies like Ether (ETH).
Risks of Yield Farming
Yield farming has a complete workflow and can significantly build impact financial risk for lenders and borrowers, and borrowers. However, yield farming generally has high Ethereum costs for gas and is only beneficial when the capital invested amounts to thousands of dollars. The risk for users is unstable losses and fluctuating prices in times of instability. CoinMarketCap offers a page ranking yield farming, an impermanent loss calculator that lets users determine their risk.
What is striking concerning yield-based farming is that it is vulnerable to fraud and hacking because of vulnerabilities in smart contract technology. This vulnerability in the code is often the result of strong competition between protocols.
The Benefits of Yield Farming
This strategy of yield farming allows investors to access an increased return on their investment or ROI. Mainly if you’ve been a shareholder since the first launch, you could earn huge profits and gain interest in the form that tokens appreciate.
For this asset to spin, the profits will be transferred back to the original DeFi project. In addition, certain liquidity pool platforms accept and loan the crypto asset from one to the next instantly.
Interoperability is a great way to increase profits and offer various choices for financial services to several users. In addition, certain professional investors are using this interoperability to boost profits in the cryptocurrency world.