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What is DeFi Yield Farming ? - A Complete Beginners Guide
Explore here the concept of Yield Farming in Decentralized Finance(DeFi) globe.
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Defi yield farming explained
What is Yield Farming?
In Crypto Globe, the mechanism through which one can earn more cryptocurrencies using cryptocurrencies is known as Yield Farming or Liquidity Mining. This is the process that lets you earn crypto rewards by staking your cryptos on your cryptocurrency wallet.
Yield Farming is similar to the concept of Cryptocurrency Staking, which provides rewards for your crypto capital investments.
Scroll down to grab more about yield farming!
Each and every industry and Business become inescapable from the process of evolution. The rate of growth of a sector depends on the rate of new trends and technologies emerging in that field to make them grow and build a better economy.
We have already discussed the Treasure Trove of Financial Industry - DeFi, The new decentralized finance.
We are now here to discuss the most intensifying term in DeFi Space - Yield Farming.
With our great grip, let us swoop into the hottest topic in crypto globe "DeFi Yield Farming".
What is DeFi Yield Farming?
Decentralized Finance, shortly termed as DeFi is an open-source protocol that provides permissionless and fast financial services. The process by which users provide liquidity to DeFi open-source protocols and get rewards is termed as DeFi Yield Farming.
In simple terms, the process of yield farming carried out on platforms that are built using DeFi protocols offers native DeFi tokens of that particular platform and this process is known as DeFi Yield Farming.
We already know that DeFi has been a trending business topic from late 2020, and now this DeFi Yield Farming is sparkling as a light in every headline of recent crypto news.
This shows that DeFi Yield Farming has caught sight of crypto wizards and it will make them shift to the next level in the crypto market sooner.
What is Liquidity?
In general, Liquidity refers to the ability of the asset to be converted to cash. In the crypto globe, the market becomes competitive when an asset gets bought or sold more. Thus, liquidity means that there isn't any discount or premium related to the buy or sell of any asset, which implies that the ability to enter or exit the crypto market is easy.
What are DeFI Liquidity Pools?
Liquidity Pools are smart contracts that lock up tokens or assets to facilitate trading by providing high liquidity. Liquidity Pools also are known as pools of tokens or pools of assets offers users better returns as compared to money markets but involves certain risks.
Uniswap and Balancer are the most popular DeFi platform termed as the largest liquidity pools which provide liquidity providers reward for adding their assets to the pool.
Here are the Top DeFi Liquidity Pools.
Who are DeFi Liquidity Providers?
The process of yield farming is nothing without Liquidity Providers. The users who stake their assets in the liquidity pools are known as liquidity providers. This process of collection of orders facilitates trading in cryptocurrency through the creation of a market. Thus, liquidity providers are also termed as market makers, as they supply what buyers and sellers want to trade.
What Made the DeFi Yield Farming Hottest Topic in Recent Air?
“The journey of a thousand miles begins with a single step.” – Lao Tzu
Likewise, this tremendous spread about the Yield Farming also has a small root from where it has been grown as the hottest topic in recent days.
This sudden focus on Yield farming can be due to the DeFi and launch of COMP Token, the native token of the Compound Finance Ecosystem because of its liquidity. Liquidity mining is a process through which yield farmers or LPs get new tokens along with the usual return.
As in recent days, Compound is playing as a popular DeFi protocol that provides best yield farming with liquidity incentives. This not only boosted the reach of Compound platform popularity but also opened a great gate of interest for Yield Farming among the crypto lovers.
How Does DeFi Yield Farming Works?
Yield farming referred to as Automated Market Maker, is nothing without the involvement of liquidity providers and liquidity pools.
Here let us look at the working process of yield farming.
First and foremost, the liquidity providers deposit or send their assets or funds to the liquidity pool. This liquidity pool provides a marketplace where users or LPs can lend, borrow or exchange their tokens or assets. These platforms collect fees which are then paid back to the liquidity providers based on their share of the liquidity pool.
This is how a yield farming process takes place on any platform.
However, working can vary with different technologies and approaches. The funds deposited are mostly stablecoins pegged to USD. DAI, USDT, BUSD are the most commonly used stablecoins in DeFi yield farming.
How Are Returns Calculated in DeFi Yield Farming?
The Estimated returns in Yield farming are calculated on an annual basis. The most important metrics in the calculation of returns in yield farming are Annual Percentage Rate (APR) and Annual Percentage Yield (APY).
The common difference between both APY and APR is that APY accounts the effect of compounding while APR does not. Compounding refers to reinvestment profits to generate more returns.
Annual Percentage Yield (APY)
The annual rate of return charged on borrowers and paid to providers subsequently refers to Annual Percentage Yield.
Annual Percentage Rate (APR)
The annual rate of return imposed on borrowers and paid to the investors is termed as Annual Percentage Rate. Since APR and APY come from legacy markets, DeFi should find its own metrics for the calculation of returns in yield farming.
This is how the returns are calculated in the DeFi Yield Farming.
Risks in DeFi Yield Farming
Everything in the universe involves risks,though life and thus Yield Farming too. Since DeFi is in its infant stage, there are more failures in DeFi products as it is completely permissionless.
Thus, yield farming with DeFi also involves risks, as farming involves depositing funds to a smart contract. This virtual process involves two anonymous parties with no central authority. And if the smart contract codes are lost and found to be an error, the entire financial transaction will also be lost. This implies that the funds transferred will be lost. This makes yield farmers lose all their assets if the system is blocked.
When the DeFi smart contracts are free from vulnerabilities, the risks involved in DeFi yield farming can be reduced.
Popular DeFi Yield Farming Platforms
There are many yield farming platforms and protocols available in the DeFi market. Each platform has their own rules and risks with different yield farming strategies.
Listed here are the some of the top DeFi Yield Farming Platforms
Compound Finance
Compound, the core protocol of Yield Farming Ecosystem.Compound is a popular DeFi based protocol that allows users to lend and borrow assets. Any user with an Ethereum wallet can supply assets to liquidity pools of compound and earn the rewards.
Yearn.Finance
A decentralized platform that converts funds to yTokens and rebalances to maximum profit periodically. It is a lending platform that farmers use which automatically chooses the best strategies.
Uniswap
A DeFi based DEX platform offers trustless token swaps due to its frictionless nature and it is used mostly for yield farming.
Aave
Aave, a heavily used lending platform by yield farmers in which the interest is adjusted based on current market conditions automatically.
Balancer
Balancer is an important liquidity protocol in yield farming strategies, as it provides more flexibility in liquidity pool creation.
There are a lot more DeFi platforms in the market to provide yield farming services. You can also contact the best DeFi Development Company to build your own DeFi platform with Yield Farming.
The Future of DeFi Yield Farming
The above-listed DeFi Yield farming provides better yields for their farmers which makes uncountable new users to those platforms each day. This process of Yield Farming is driving the DeFi space to the next level in the crypto market.
In the future, there may be more and more DeFi based platforms inherited with automated yield farming that will tend to rock the crypto globe. This yield farming has inspired many individuals and yet to attract many in the nearer future.
Let us be ready for the robust DeFi world encompassed with Yield Farming!
Who we are ?
“Change before you have to.” —Jack Welch
Be a pioneer in adopting any new business trend to bring significant changes in the business world.
Hope this article has charged your mind with the concept of Yield Farming and its importance.
Having a line of thought to initiate your own yield farming business? We are here to assist you.
DeFI Yield Farming Platform Development Company
We Bitdeal - Leading DeFi Yield Farming Platform Development Company offers the best DeFi-based yield farming development services across all borders. By deeply understanding the purpose of DeFi and Yield Farming in the future, our experts started providing the best solutions to launch your own new DeFi yield farming like Compound, Yearn.Finance, Aave, and more or integrate DeFi based yield farming protocols in your existing platform.
If you still have doubts about how this Yield farming can help you in making more money, feel free to catch our experts anytime. They are always ready to clear all your business related queries.
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