If you are interested in Defi, perhaps you have searched on Google a couple of times to have Yield farming explained to you. However, if you have just set your foot into this lucrative way of seeking profits with cryptocurrency or still find yourself grasping just a vague idea of Yield farming. Please read through the article below to learn more about it.
What is Yield Farming?
Yield Farming is a strategy applied in Decentralized Finance (DeFi) for ones that are actively finding ways to bring in profits and rewards. It’s when a user puts their cryptocurrency in a contract controlled and regulated by DeFi’s and this allows other users to come to this pool to borrow, lend, making stakes with the cryptocurrency.
Consideringly, Yield Farming seems very appealing to people at both ends. Especially for people who want to do something with the money sitting idle in their wallets. The deposit promises a passive flow of profit to fund owners. Moreover, this also helps to provide opportunities to users still seeking tokens for marginal tradings.
To begin with, you need to have basic knowledge of how Yield Farming works and get the hang of information about all parties involved in the process of smart contracts.
- Liquidity provider: The provider of funds that deposits cryptocurrency in the cryptocurrency pool and the projects.
- Liquidity pool: the smart contract that stands between the Liquidity provider and the Yield Farming project.
The smart contract has the function to control everything since you put your funds in the project and its rules are constructed by the protocol. The contract’s terms help to decide the gains you will collect for your investments and set limitations to users that seek funds in Yield Farming.
How Yield Farming works
The Yield Farming process is not much of a complicated one. However, several things need to be focused on to make it yield a lot of profits.
The way it works can be put in a nutshell as below:
- A liquidity provider would decide to put funds into a Yield Farming project. Majorly, the stablecoins (funds in the contract) will be pegged against USD (the United States Dollar). For example, they can be USDC, DAI, USDT.
- These funds are locked up by the smart contract and they are accessed according to the rules and protocols of the smart contract and the Yield Farming platform supervision. These rules and protocols also contribute to calculating how much you will earn in returns and offer you rewards based on the cryptocurrency you have deposited in the project.
- Your gains are often the cryptocurrency you have used to invest in the first place but sometimes, Yield Farming can provide you with some tokens that haven’t been listed in the open market yet.
As soon as you have landed a Yield Farming contract that you find trustworthy and sustainably profitable, in case you want to play it safe, being satisfied with the income source the project is offering would be a great idea for you to act on.
Nonetheless, if you are always a bold investor and feel confident with your insight into Yield Farming, you may want to find a more lucrative way to make the most of your cryptocurrency funding and in quest of greater outcomes. This requires you to have a flexible and effective way to search for high returns.
Yield Farming doesn’t have a rule that prevents you from putting the rewards from one contract in another and so on. Yield Farming users can freely make up intricate patterns of Yield Farming designs. On the other hand, this strategy will help Liquidity providers to diversify their cryptocurrency asset portfolios. Find your effective way to make the most of Yield Farming and take the advantage of the strategy and chances are you will optimize your profits to the full capacity.
The risks of Yield Farming
Defi’s smart contracts are digitized and frankly, As precise and revolutionary as the technology has become today, technology tools are not always perfect, they still can be found with some glitches and errors that mess up with their configuration and processing. We still love smart contracts for their being objective and strict in their way but sometimes errors can happen and it causes a lot of troubles to users and distorts the precision of the calculation of the profit. The strictness of the smart contracts’ protocol sometimes can be annoying to us too when different cases of conflict sometimes can be too nuanced and complicated to set up digitalization.
If the glitches and errors in the contracts are not adjusted rightly timely, the issues that have bad influences on your returns will go on, causing damages and loss of your income.
In the DeFi blockchain, one thing is linked with one another, the problems from one blockchain network may lead to other disturbances. A mishap or delay in a single thing will have a bad impact on your funds and gains like a glitch in verification or blockchain network.
In case it is properly used, Yield Farming can bring to you more than you can expect, from a stable money inflow or some colossal profits. Below are some things that need keeping in mind to maximize Yield Farming offerings :
Get the hang of what Yield Farming is and the fundamental tactics to make profits from it.
- Utilize the “Compound platform” strategy for a stable source of income. The compound platform comes from the popularity of applications like Compound. It uses its native tokens to offer borrowers and lenders The idea of borrowing idle tokens and lending them back to Compound did draw its inspiration from the emergence of Compound and helps to form the concept of Yield Farming.
- Once a reliable DeFi application is found, it’s always fine to stick with a safe project and give a sustainable cryptocurrency inflow.
- Learning deeply about the projects that you want to entrust your cryptocurrency to. The prestigious ones such as Compound, Aave, and Uniswap sound like a great choice for new beginners and ones who don’t know much about the field. Also if you are more ambitious, you can join other projects with higher claims of profits but please think twice before joining anything.
Things to avoid
Yield Farming is not always safe. There are some things that you must avoid to minimize the odds that you are at a loss.
- Don’t place all of your cryptocurrency into just one contract.
- Use an app that is not reliable to join DeFi. There are a lot of platforms just trying to make money from you. You’d better be careful.
- Join Yield Farming without a proper plan. Everything needs a plan, especially for business.
The bottom line
There are risks in Yield Farming besides opportunities, of course, and you have to remain on alert before investing and joining in any contract. However, you can still choose a reputable app and be satisfied with your frequent source of income. In case you are more ambitious and serious about the business, you will make use of this DeFi profit-gaining tactic, being adventurous is ok because once you have a good plan and are savvy about the market, the chances that you gain maximum profits back are very high.