What is Yield Farming?

The DeFi world is full of opportunities, and we love it! No matter where you are in the world, you can take advantage of protocols that can give you higher interest, loans, derivatives, options, and pretty much anything your financial taste desires. In this post, I will explain one of the features that are a gift and curse of the ecosystem, “Yield Farming.”

To explain this clearly. We need to start with the basics. Like, what the hell is Yield Farming? To give you a comprehensive description, here is how binance describes it:

“Yield farming, also referred to as liquidity mining, is a way to generate rewards with cryptocurrency holdings. In simple terms, it means locking up cryptocurrencies and getting rewards.”

That one was a straightforward explanation. However, here is a more relatable one from Business Insider:

“Yield farming is a means of earning interest on your cryptocurrency, similar to how you’d earn interest on any money in your savings account. And similarly to depositing money in a bank, yield farming involves locking up your cryptocurrency, called “staking,” for a period of time in exchange for interest or other rewards, such as more cryptocurrency.”

Now to get a bit more complex and sophisticated. The Defiant says:

1.  It often requires providing liquidity or lending liquidity in a permissionless DeFi protocol to earn passive income.
2.  It results in traders earning more than one form of Yield simultaneously; a lending rate or liquidity provider fee, plus additional token rewards in the form of the protocol’s native token. 

Now here is our definition of if:

“Yield Farming Provides liquidity for a protocol in exchange for daily, monthly, or yearly interest rates or token rewards.”

Here are some videos in case you are still confused.

 

 

 

Yield Farming can be quite complex. You may have to deposit 2 or 3 different cryptocurrencies to get it, not to mention the volatility that can lead to impermanent loss (We will discuss this in another post). Still, many users flock to this because of the high amount you can earn or if they want to receive the desired token. A good example is Uniswap if you decide to provide liquidity to this decentralized exchange, you can get Uni tokens that will let you participate in the governance. 

There are many Yield Farming protocols mainly built on Ethereum, but you can find some on BSC, Polygon, Solana etc.. Users jump from protocol to protocol in search of the best Yield so rates may vary depending on the liquidity and usage provided. 

Yield farming could lead to high rewards but also high risk. You could get wiped out and lose all your crypto in some cases. So it’s best to do research, and if you are willing to try this, invest minimal amounts as you start. 

In our next post, we will talk about impermanent loss and how not to get rekt in crypto.