Yield farming started in the year 2020, and from that time, yield farmers have profited from it. If you want to get more returns from your crypto investments, you should be concerned about yield farming. So many users of cryptocurrency are now involved in this act, as it is the best way to make more returns on the platform. In this article, we will explain all things about yield farming, the way it works, its advantages, and the dangers of it to increase your cryptocurrency income.
Yield farming can be defined as the act of giving out cryptocurrencies to increase returns or rewards which come in cryptocurrency form. Cryptocurrency holders will earn rewards on their holdings. Yield farming is an investment tactic in decentralized finance (Defi).
What is Decentralized Finance (Defi)?
Decentralized finance is a growing technology in financial activities, and it was formed to take out middle men in business transactions. It has created so many areas of earnings for people who invest in it. Furthermore, it is part of the investment tactics in decentralized finance.
How Yield Farming Works?
People who give out cryptocurrencies to make the decentralized finance platform work are referred to as liquidity providers (LPs). They give out their tokens to a liquidity pool where all funds are kept and contained. Immediately after the liquidity providers pool their contributions into the fund, they will be given a reward which is gotten from the fundamental decentralized finance platform that the pool operates on.
This is a great way to have financial transactions. Giving out tokens through sensible contracts, but without the presence of middle men. However, the use of the marketplace brings about fees, and these are given to the liquidity providers because they put down their contributions into the liquidity pool. The people who lend can make use of the tokens anyhow they want to but the majority of them nowadays act as lookouts, searching for break-even point chances in the marketplace by taking advantage of the instability of the tokens.
Benefits of the Yield Farming
There are some benefits of Yield Farming. They include;
- Returns increase: if you plan to hold cryptocurrency for a very long time, it can help you make more returns on your holdings. This is one of the benefits of yield farming.
- Low-risk: staking and giving’s offer a low-risk method to get more returns, received in the same crypto holding you possess.
- Helps the crypto environment: As a participant, yield farming activities provide support for the whole ecosystem of the crypto.
- Turbocharge returns: the yield farmers can also make their returns turbocharge with the help of liquid mining. This helps the yield farmers very well.
However, as there are benefits, there are also dangers of Yield Farming, as seen below.
Dangers of Yield Farming
The dangers of Yield Farming include;
- Vulnerable Defi applications: the Defi applications strategy is very open and vulnerable to hackers, and it has become regular.
- High chance of loss of value: there is a big danger of entering Defi platforms with very new and unused tokens because they have a high chance of losing their worth, thereby making the whole decentralized ecosystem break down.
- Risk of liquidation: when yield farmers borrow and give out quickly to increase the income they can get from providing liquidity to the Defi platform, there is a huge risk of liquidation.
- Defi smart contract risk: A bug in the smart contract can make the tokens drop to zero.
- Unfairness: most of the yield farming pools are controlled by very wealthy investors, and if the investor takes out several investments, the platform can be affected.
- Impermanent loss: immediately you deposit your token into the liquid pools, the price of the token can change and this is very risky to the liquidity platform. This is one of the dangers and risks of being a yield farmer.
Conclusion
Cryptocurrency users and holders most times get tired and frustrated because of low or no income, but a way to generate more earnings and returns has been provided with the help of the decentralized finance (Defi) platform. However, using these platforms comes with some risks and dangers, and can eventually lead to the liquidation of your holdings. There are also benefits of the decentralized finance platform strategy called yield farming, but before deciding on being a yield farmer compare the risks and benefits, know how much you can invest, and you are good to go.
Frequently Asked Questions
1. How can I start yield farming?
Yield Farming begins by adding funds to the liquidity pools which are primarily smart contracts containing funds.
2. Impermanent loss is caused by what?
Impermanent loss occurs when there is a change in the prices of tokens after dropping into the liquidity pool.
