What are Defi Yield and Yield Farming?
Yield Farming is among the most exciting subjects in Defi farming. And you may be eager to read up on this buzzword. So what is Defi yield farming? How does it work? And also, what are the most popular protocols of Yield farming? We’ll shed light on all of these questions in our article. Just keep reading.
Table of Contents
How Does Yield Farming Work?
Yield farming, first and foremost, is aimed at expanding a rate of return on investments by using different Defi strategies and protocols. These protocols help yield farmers give a chase to higher yields. However, when the strategy doesn’t bear fruit or when you find a better strategy available, you can simply move your capital around. For instance, you can even move your capital between several protocols until you find the one with the best benefits. Yield farmers sometimes call this process ‘crop rotation’.
Yield farmers choose between saving accounts by the highest level of annual percentage yields (APY). The former is quite a common way to measure the profit made within different yield farming strategies. You just need to invest coins or tokens in a decentralized application through smart contracts to earn interest on it. The Decentralized applications or dApps include decentralized exchanges, decentralized social media, digital wallets (Coinbase, MetaMask) and more.
You may still wonder what does yield farming do? To keep it simple, you lock up different cryptocurrencies and digital cash in a Defi market and get rewards.
What are the Types of Yield Farming?
We can find out various types of yield farming and farming approaches. In general, all yield farming variants focus on users’ deposits through smart contacts. However, there are distinguishing factors for each variant, namely the underlying technology and the type of smart contract. So, let’s read up on types of yield farming to understand it completely:
- Liquidity pools or LP farms enable you to securely deposit cryptocurrencies in a smart contract programmed initially to offer the liquidity pool. In other words, they keep your tokens and lock them in a smart contract. Only liquidity providers can set and control cryptocurrencies by which trades are possible. Decentralized finance apps offer assets to liquidity providers as exchanges for their deposits.
- Stake farming is another yield farming approach worth considering. In the case of stake farming, you deposit your crypto assets in the protocol powered by a smart contract in exchange for privileges to verify transactions on the protocol. The stake farming approach in yield farming is mainly aimed at the security of your deposits. Compared with liquidity farms, this approach promotes a well-organized and efficient experience for yield farmers.
- Insurance mining is focusing on the farmers who have deposits only in insurance funds. Insurance mining is considered to be extremely risky as high insurance claims can be borrowed. Yield farmers can have a great experience through this approach.
- Arbitrage mining is a progressive example of leveraging prices to your advantage. The point is that yield farmers purchase crypto tokens from one exchange and sell them on another straight away thus taking advantage of the price difference. For successful trade, you should evaluate the price charts carefully to predict the time when the price will soar or dropdown.
- Trade mining
Yield Farming Protocols to Know About
Enthusiastic investors are constantly getting new opportunities in the emerging world of yield farming. It provides users with beneficial chances to improve their incomes. However, in order to make a considerable profit, you should analyze thoroughly and find the best yield farming protocols. To make your task easy, we have gathered all the information you need to know about yield farming protocols. So keep reading.
When it comes to the top yield farming protocols, Aave cannot be left unnoticed. It is a top-rated, non-custodial liquidity protocol that facilitates the yield farmers to borrow and deposit assets, earn interests and build applications. This widely used platform’s market is worth more than $3.4 billion. The native token of Aave protocol governance is AAVE. The former enables the users to vote for governance, have fee discounts and enjoy other significant benefits.
Users’ deposits are distributed in smart contact, which code is public and open-sourced. Users can lend their preferred asset and amount, and receive passive income depending on the market borrowing demand. However, the more money you deposit, the more volumes of tokens you are likely to gain.
Aave protocol doesn’t have any mobile application to download. It even doesn’t advertise on any social media. So if you encounter an advertisement or mobile app download suggestions, these are phishing websites, keep it in mind!
Launched in January 2020, Curve finance is becoming an extensive Defi platform with its dominating $21.3 billion total value locked. Curve finance ensures efficient stablecoin trading and provides users with high-interest returns. Stablecoin is a type of cryptocurrency that offers investors a stable price. It helps users keep away from more volatile crypto assets.
Besides its native token CRV, mainly used for the governance of the Curv DAO, Curve finance includes a wide variety of stablecoins, namely USDT, USDC, BUSD and TUSD.
Curve finance enables users from other Defi applications to use Curve pools as a part of their platforms. Yearn finance, for instance, use this protocol as a farming solution. However, like any other platform, there are also risks with Curve finance. Smart contract failure and temporary loss are considered to be the highest risks.
The Uniswap protocol is so high-ranking that investors often call it the king of Defi exchanges. It is open-sourced protocol available on the Ethereum platform. Uniswap enables users to purchase, trade and swap tokens without the need for an order book. And for every swap, the users get a percentage or trading fees. However, market fluctuation and liquidity pool impose the interest rates on the platform.
Uniswap protocol eliminates the need for trusted intermediaries; meanwhile, it emphasizes the priority of security, censorship, accessibility and efficiency.
It’s important to consider the possibility of smart contract failures and potential losses.
Onether top Defi protocol is PancakeSwap, which is based on Binance smart chain network and is completely open-sourced. Since 2020 the platform has gained popularity and now it has a trading volume of about $405M. All exchanges on PancakeSwap are performed via smart contact, which reduces the chances of counterparty risks.
The native token of PancakeSwap is CAKE. Users can use the token for different purposes, such as participating in the PancakeSwap Lottery, yield farming, staking and voting on governance proposals. Besides all the functions above mentioned, there is also a gambling game available on the platform, where users have to predict the future Binance coin price. In order to access PancakeSwap, users should switch one of their digital wallets, namely MetaMask, TrustWallet and WalletConnect. However, like any other protocol, PancakeSwap also has various risks, namely price fluctuation, smart contract failure, etc.
Another top money market protocol is Venus, available on a Binance Smart Chain. It provides decentralized finance-based borrowing as well as lending. Venus enables its users to deposit cryptocurrencies in order to earn higher rate interests. Moreover, they can make use of their collateral, earn interest on collateral and take a lot of advantages on the platform. Today, in Defi’s fast-growing world, Venus stands out with its high speed and, at the same time, low transaction prices. Thus, Venus tries to provide a more reliable and healthy marketplace for its users.
What Are the Risks of Using Defi?
As Defi is a fast-growing and emerging financial technology, it’s worth considering the risk that Defi could involve. Here we have collected the main risk categories you can encounter, including token risk, impermanent loss, and gas fees. Let’s discuss some of the common risks.
- Software risk is among the most common ones, and, as we have already mentioned, Defi protocols are also software applications. The first software risk is connected with security. Vulnerability can allow hackers to break in and rob your funds. Another frequent risk is coding errors or so-called bugs. They can lead the application to malfunction.
- Counterpart risk is something related to the loan agreements. This can happen when you loan someone money, but don’t get repaid. So before depositing money in a Defi protocol, make sure you find out who is going to borrow your money and if they fail to pay back the money how the loans could be collateralized.
- Regulatory risk is also very common. The main reason is that there is no government oversight or regulations to operate Defi platforms. However, this condition could be changed, and it is still not clear whether new government regulations operating Defi protocol will negatively affect your investments or not.
Can I Use DeFi Yield If I Don’t Have Any Dai?
Nowadays, having Dai in order to join Defi is a must. If you are eager to join this life-changing experience but do not have any Dai you can get Dai by purchasing it with fiat currencies like the pound sterling, the Us dollar and the euro.
Is Yield Farming Better than Staking?
Yield farming and staking may seem almost identical if you are new in the Defi world. Some investors sometimes use the terms interchangeably. There are even people who see staking as a subset of yield farming. However, there are key features that distinguish these two terms. So if you are looking for a simple passive income strategy, staking will be your favorite. You should just choose a staking pool and lock your crypto. Whereas yield farming is a bit complex: you should decide which token to deposit on which platform with the possibility of constantly moving around your tokens. Moreover, you should consider potential risks that are more common for yield farming platforms.
Conclusion
We have covered a lot about Defi yield and Yield farming. Let’s sum up to make sure you are ready to be the best farmer in this emerging digital world:
- Decentralized finance (Defi) is a developing financial technology that removes the intermediaries in financial transactions.
- Yield farming is a high-risk and, at the same time, high-reward strategy.
- The most common risks include regulatory risk, software risk, counterpart risk, token risk and impermanent loss.
- The better you analyze yield farming protocols, the higher your benefits will be. The most popular yield farming protocols worth considering are Aave, Curve finance, PancakeSwap, Uniswap and Venus.
Although Yield farming is still in its infancy and contains potential risks, it promises to be the best financial strategy to gain passive income. By the interest of farmers and users, we can guess that yield farming is the future. And if you are reading our article, it already means you are going to be on the cutting edge technology of investing. Start with small deposits, don’t try to do too much too fast.
