• Kokholm McKee posted an update 2 months, 4 weeks ago

    Decentralised finance (DeFi), a growing financial technology that aims to eliminate intermediaries in financial transactions, has opened multiple avenues of revenue for investors. Yield farming is one such investment strategy in DeFi. It calls for lending or staking your cryptocurrency coins or tokens to get rewards in the form of transaction fees or interest. This can be somewhat just like earning interest from a checking account; you happen to be technically lending money on the bank. Only yield farming may be riskier, volatile, and complex unlike putting take advantage a bank.

    2021 has changed into a boom-year for DeFi. The DeFi market grows so fast, and it’s really even strict any changes.

    Exactly why is DeFi so special? Crypto market gives a great possibility to bring in more cash in several ways: decentralized exchanges, yield aggregators, credit services, and even insurance – it is possible to deposit your tokens in every these projects and get an incentive.

    Though the hottest money-making trend have their tricks. New DeFi projects are launching everyday, interest rates are changing constantly, some of the pools disappear completely – and it is a huge headache to hold a record of it however you should to.

    But remember that committing to DeFi can be dangerous: impermanent losses, project hackings, Oracle bugs as well as volatility of cryptocurrencies – these are the problems DeFi yield farmers face all the time.

    Holders of cryptocurrency have a choice between leaving their idle in a wallet or locking the funds within a smart contract in order to give rise to liquidity. The liquidity thus provided is known to fuel token swaps on decentralised exchanges like Uniswap and Balancer, in order to facilitate borrowing and lending activity in platforms like Compound or Aave.

    Yield farming is actually the practice of token holders finding methods for utilizing their assets to earn returns. For that the assets are widely-used, the returns may take variations. For example, by being liquidity providers in Uniswap, a ‘farmer’ can earn returns in the form of a share in the trading fees each and every time some agent swaps tokens. Alternatively, depositing the tokens in Compound earns interest, as these tokens are lent out to a borrower who pays interest.

    Further potential

    But the risk of earning rewards does not end there. Some platforms in addition provide additional tokens to incentivise desirable activities. These additional tokens are mined by the platform to reward users; consequently, this practice is called liquidity mining. So, as an example, Compound may reward users who lend or borrow certain assets on his or her platform with COMP tokens, which are the Compound governance tokens. A lending institution, then, not merely earns interest and also, in addition, may earn COMP tokens. Similarly, a borrower’s interest rates could possibly be offset by COMP receipts from liquidity mining. Sometimes, like if the worth of COMP tokens is rapidly rising, the returns from liquidity mining can more than make up for the borrowing rate of interest that you will find paid.

    If you’re happy to take additional risk, you can find another feature that permits even more earning potential: leverage. Leverage occurs, essentially, whenever you borrow to speculate; as an example, you borrow funds from a bank to get stocks. In the context of yield farming, a good example of how leverage is created is you borrow, say, DAI inside a platform including Maker or Compound, then use the borrowed funds as collateral for even more borrowings, and do this. Liquidity mining will make this a lucrative strategy once the tokens being distributed are rapidly rising in value. There is certainly, naturally, danger that doesn’t happen or that volatility causes adverse price movements, which will lead to leverage amplifying losses.

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