What are things behind the enthusiasm for cryptos? It’s something relatively new for many of us. It’s Decentralized Finance or DeFi for short. This new concept looks like the traditional banking system that cryptos have come up with before, but it is different from what we have known about this term in fintech.
In this article, we’ll get yield farming explained, which is a hot topic in DeFi, so that you can understand why many people are talking about it. If all these things sound a little puzzling to you, don’t worry! We are here to resolve your skepticism of how yield farming is explained.
So What Is Yield Farming?
Yield Farming is a form of staking cryptocurrency or lending crypto assets to generate profit (% profit or reward in the form of a new cryptocurrency). This is an innovative but also risky and volatile feature of the decentralized finance (DeFi) system.
The Reasons Why Yield Farming Is So Popular
The apparent benefit of Yield Farming lies in the attractive profits brought to each investor. Up to now, the form of interest farming still generates higher interest rates than players depositing money in traditional banks. However, high interest rates come with certain risks.
In 2020, Yield Farming had explosive growth in popularity, the number of participants. It is estimated that a considerable amount of money has been created through the Ethereum ecosystem. Productive mining platforms that operate on Ethereum and the DeFi engine system dominate the market.
Yield Farming’s productive farming process has also pushed the advent of many different protocols. When owning an infrastructure platform that includes a community of users who share the same passion and actively participate in the system’s activities, it can easily attract more partners to cooperate.
Yield Farming has become as popular as it is today in part because it supports projects in terms of liquidity. Along with that is the benefit for both lenders and borrowers. Yield Farming helps everyone to have access to capital in the world of DeFi finance.
DeFi Platform For Yield Farming
Investors who want to use Yield Farming to increase their profits can go through the following DeFi platforms:
Compound: is a currency market that allows users to earn interest by depositing crypto-assets into several pools supported by the platform.
MakerDAO: is the first decentralized credit exchange that allows users to lock cryptocurrencies as collateral to borrow DAI, a USD-pegged stablecoin. Interest is paid as a “stabilization fee.”
Aave: is a decentralized liquidity exchange where users can participate as depositors or borrowers. Depositors provide crypto assets to the market to earn passive income, while borrowers can borrow either over-collateralized (permanent) or uncollateralized (one-block liquidity).
Uniswap: is a protocol for creating crypto mobility and trading ERC-20 tokens on Ethereum. Uniswap eliminates intermediaries and unnecessary fees, allowing for fast, efficient transactions.
Balancer: is an automatic market maker (AMM) platform developed on the Ethereum blockchain and launched in March 2020. Balancer acts as a self-balancing, price-adjusting portfolio. And crypto coordination. Participants in the Balancer will receive back BAL tokens.
Synthetix: is based on the Ethereum (ETH) blockchain and provides highly liquid synthetic assets (synths). Synths track and deliver returns on the underlying investment without requiring investors to hold the purchase directly.
Yea rn. Finance: uses its algorithm so that investors can choose from many different DeFi lending platforms like Aave and Compound for the highest yield. Yearn. Finance made waves in 2020 as its YFI governance token grew to over $40,000 in a short time.
Yield Farming Vs. Other Forms Of Investment
When new to the cryptocurrency market, perhaps not many people see Yield Farming with some other form of investment. Examples include liquidity mining, staking, and cryptocurrency mining.
Yield Farming and Liquidity Mining
Many people often get confused between Yield Farming and Liquidity Mining. Although they can be used interchangeably, there is a fundamental difference.
Both Yield Farming and Liquidity Mining have the potential to generate profits from governance tokens. In it, Yield Farming will need DeFi applications, such as leverage. As for Liquidity Mining, it works based on the Proof of work algorithm.
During liquidity processing, the pool of miners will manage to earn a dividend swap equivalent to 0.3%. Along with that are the newly mined tokens after successfully identifying the block of transactions and saving them in the Blockchain ledger.
For Yield Farming, however, the liquidity provider uses DeFi decentralized finance platforms. Here, allow them to transfer money or lend money to earn interest.
In addition, Yield Farming participants can also use leverage when borrowing or lending stablecoins. At the same time, players will apply different money transfer strategies to optimize interest rates.
Yield Farming and Crypto Mining
Yield Farming and Crypto Mining forms of cryptocurrency mining have a relatively significant difference. Specifically, Crypto Mining mainly runs on the Proof of work algorithm. Meanwhile, Yield Farming relies on a DeFi application that operates primarily on the Ethereum network platform.
Compared to cryptocurrency mining, profit farming is an advanced way to earn rewards still. However, players must own cryptocurrency to participate in the lock and deposit to make a profit.
In a nutshell, Yield Farming is like a form of users lending out properties they own to receive interest. As for cryptocurrency mining, users will directly participate in the mining process with their efforts and the hardware system they invest in.
Farming and Staking
The Staking staking process works based on the Proof of Stake consensus mechanism. Accordingly, validating participants create blocks through a completely random selection process, earning rewards from active investors in the same platform. Then, the higher the bet, the bigger the prize.
As for Yield Farming, players will generate profits from the tokens they are holding through lending and interest.
On the other hand, Staking requires a more significant amount of cryptocurrency to increase the chances of being selected as a validator in the next block. Depending on the token’s block formation, players may have to wait up to several days to receive their staked rewards.
Yield Farming participants have the right to move assets flexibly whenever it is essential to optimize the possible profit. Compared to staking, profit farming allows you to send your notifications to the liquidity pool integrated on the protocol.
Yield Farming is a form of making money through the player’s house locking its assets. The assets here are usually cryptocurrencies. It works almost similar to the structure of savings in traditional banks, but the deposit process is more straightforward, the interest rate is more attractive.
That’s everything we want to show you about yield farming. Hopefully, after reading this summary, you have a better understanding of Yield Farming.