DeFi is one of the leading applications in blockchain innovation. DeFi apps will save users from having to depend on any custodial institution or middle services.
The fact that in the DeFi crypto world, investors are always looking for ways to increase their profits or increase the number of coins they hold by transactions. Now, a new method can help increase the number of coins for investors called “Yield Farming“.
So what is Yield Farming? Let’s find out the useful information below.
With yield farming form, Farmer or Liquidity Provider, are trying to increase their “yield” with increasing interest on the original assets like cryptocurrencies. are included in the liquidity pools on DeFi platforms like Compound, Aave, or LaunchZone (Bscex).
A Liquidity pool is a smart contract that contains coins or tokens in it.
The revenue generated by the Liquidity Pool is the transaction fee when the end-user performs activities in the pool, such as borrowing, lending, and exchanging tokens.
This revenue will be distributed back to the Liquidity Pools according to the percentage of liquidity they have provided in the pool (share of the pool).
In addition to revenue from fees of many protocols, Liquidity Mining is also deployed. This is a form of token distribution to the market as well as profitability for the Liquidity Pools that have provided liquidity into their protocol. That is how projects attract liquidity to their protocol, with so many Liquidity Mining extremely fast growth and huge profits that have made Defi hotter than ever.
The role of Yield Farming in the DeFi system
The sudden strong interest in productivity farming could be attributed to the launch of the COMP token – the governance token of the Aggregate Finance ecosystem. The admin token grants administrative rights to the token owner. But how to distribute these tokens if you want to make the network as decentralized as possible?
A popular way to start a DeFi blockchain is to distribute an algorithmic governance token, with liquidity incentives. Then the provider will “mine” the new token by providing liquidity for the protocol.
Even though it didn’t invent productivity farming, the COMP launch event helped this kind of token distribution model become more popular. Since then, other DeFi projects have come up with innovative plans to lure liquidity to their ecosystems.
How does Yield Farming work?
You may have heard of the term “automated market maker”. Examples: Uniswap, 1inch, Balancer, Yearn Finance (YFI), YFII, YFV, YFIS, Aave (LEND), Compound (COMP), Curve (CRV), Serum (SRM), JUST (JST), etc.
And how does an automated market maker work? First, Liquidity Pool provides weapons to pools, pools that allow users to borrow, buy and sell. An exorbitant fee per transaction will be charged to the Liquidation Group as a percentage. Very simple, right?
Besides, DEX exchanges attract Liquidity Pools to pour money in by paying additional tokens of value. Anyone who has ever raised will know, there are many valuable tokens such as SRM, SUSHI, BAL, etc. These are very HOT tokens today.
Usually, the estimated profits for yield farming are calculated annually. The common metrics are the Annual Percentage (APR) or the Annual Percentage (APY). The APR does not take into account the effect of compound interest, while APY does. In this case, compounding means directly reinvesting profits to make more profits. However, APR and APY can be used interchangeably.
How to earn on Yield Farming?
The winners are the Whales who hold millions of dollars in farming, which in turn earns administrative tokens. Whales simply have a relationship with the project, spending large farm money making the split of individual players smaller.
Early retail investors (FOMO) could either make a lot or lose their invested money. The losers will be the FOMOs who come later when the price is too high.
So to reduce the risk, we should be the one to farm early and buy some tokens of governance at the acceptable price is considered playing the lottery.
Featured Yield Farming projects
Yield Farming has opened up a new opportunity for users to receive attractive rewards from DeFi projects. However, each project will have different Yield Farming campaigns that you should research before putting the money you hard-earned in it because sometimes the profit you get will not be what you expect. Below, we will introduce to you the outstanding Yield Farming projects with different Yield Farming campaigns.
The Compound is a project providing loan and loan services. When users provide liquidity to Compound, they will receive a COMP token reward, however, the interest rate will change according to the law of supply and demand. Every day, about 2,312 COMP tokens are distributed to users through different markets on Compound (ETH, DIA, BAT, etc.), with interest rates on each market. For each market, 50% of tokens will be distributed to liquidity providers, the remaining 50% distributed to borrowers.
Users can create DIA – a stablecoin pegged to the dollar price in the MakerDAO. Users will also mortgage their assets (ETH, BAT, USDC, etc.) into the protocol to create the DIA as a loan from their collateral. People can use DIA for Yield Farming in another platform such as Compound
Yield farming is potentially risky and requires players to be vigilant. If the participant fails to capture it, they will potentially lose all of their assets.
Smart contract risk: These protocols are often developed from small groups making them more likely to fail in smart contract code. The root cause is not enough budget to perform the audit. But even with an audit, errors can still happen and assets are easily stolen. Cases have happened like Curve or BZRX.
Risk can be liquidated: When the market is volatile, this can affect users’ positions and, as a result, collateral will also fluctuate drastically.
Bubble Risk: This is a matter of concern. When Compound introduced liquidity mining, things started to happen to lead to the risk of a bubble happening in the DeFi community.
Locking assets for interest is not too new in the crypto market. However, Yield Farming is booming with DeFi fever. It is expected that Yield Farming will create the value of its products associated with practical benefits and more life. With great hope that it will not stop at Crypto but also become a major financial stream in the world in the future.
However, the risk of productivity farming persists due to the weakness of smart contracts. Therefore, you should be careful when depositing money on DeFi protocols to farm.