Almost every person wants to increase her/his return from cryptocurrencies, so they consider various strategies in the field. At that point, we encounter yield farming which is a process offering the chance of maximizing returns. Now, we would like to explain yield farming and its details to improve your knowledge about gaining in the crypto world!
What is DeFi?
Before explaining the notion of yield farming, we should explain the notion of DeFi because there is an important relationship between these two notions.
DeFi stands for decentralized finance, and financial constructions that do not depend on authority or center are called DeFi. Hence, the notion is an umbrella term for peer-to-peer financial services on public blockchains.
According to a lot of research, DeFi has the power of offering a better system than traditional finance systems. For supporting the idea, we can mention some advantages of DeFi. Firstly, every person with a crypto wallet and internet connection can access DeFi services because DeFi is permissionless and inclusive. Secondly, transactions in DeFi services are transparent, and they are found in real-time. Thirdly, quick, secure, and cheap money transfers can be done with the help of DeFi services. Generally, DeFi services are safe for users, and the services consider the users’ different circumstances in the crypto world.
What is yield farming?
Now, we can focus on the notion of yield farming. First of all, we want to explain the relationship between DeFi and yield farming; yield farming can be done by using DeFi services, so if there is no DeFi, people cannot consider yield farming. Also, at that point, we want to emphasize that people who deal with yield farming are called yield farmers.
Through yield farming, individuals can lend or borrow crypto with the help of a DeFi service, and then, they can increase their return in the crypto. For example, token holders can consider lending their crypto by utilizing yield farming to maximize rewards on different DeFi platforms. Hence, if a person puts her/his tokens or coins in a dApp standing for decentralized application, s/he can get yield with the help of yield farming.
Generally, decentralized exchanges (DEXs) are considered by yield farmers for lending, borrowing, staking coins, and playing the market.
Kinds of yield farming
Yield farmers can consider borrowing for yield farming. They can make one token collateral, and they can obtain loan from another. Then, the farmers can yield with the help of borrowed assets. With the process of borrowing, yield farmers can keep their initial holding that can encounter a rise in its value and earn a return from the borrowed digital assets.
People should be investors who stake their cryptocurrencies on decentralized exchanges for gaining transaction fees for being liquidity providers. These transaction fees can be sometimes paid in new liquidity pool tokens.
The process can be explained as the opposite of borrowing. If a person lends her/his digital assets to borrowers through smart contracts, s/he can earn yield from the process.
We can say that staking is a type of yield farming, and there are two kinds of staking in terms of yield farming. The main version of staking, which is known by everyone, is found on proof-of-stake blockchains in which users can get payments for pledging their assets to the network. On the other hand, the second version of staking depends on liquidity pool tokens; users can earn yield twice. In other words, users can receive liquidity pool tokens if they provide liquidity.
As you can understand, yield farming is a process that provides users with maximizing returns in the crypto world. Yield farming is managed by smart contracts and a part of the global DeFi system, so people can focus on the process for earning in the digital world. However, the process has also some disadvantages. For instance, users can encounter scams and fraud, impermanent losses, and tax-reporting situations during yield farming. Therefore, you should consider all aspects of yield farming before dealing with the process.