• Bullard Holmgaard posted an update 4 months, 1 week ago

    Decentralised finance (DeFi), a growing financial technology that aims to take out intermediaries in financial transactions, has exposed multiple avenues of capital for investors. Yield farming is but one such investment strategy in DeFi. It involves lending or staking your cryptocurrency coins or tokens to obtain rewards as transaction fees or interest. This can be somewhat comparable to earning interest coming from a bank-account; you might be technically lending money for the bank. Only yield farming can be riskier, volatile, and sophisticated unlike putting cash in a bank.

    2021 has turned into a boom-year for DeFi. The DeFi market grows so fast, and even hard to follow all the new changes.

    Exactly why is DeFi so special? Crypto market provides a great opportunity to bring in more cash in lots of ways: decentralized exchanges, yield aggregators, credit services, and even insurance – you’ll be able to deposit your tokens in all of the these projects and acquire an incentive.

    However the hottest money-making trend has its tricks. New DeFi projects are launching everyday, interest levels are changing continuously, some of the pools vanish – and it is a big headache to hold an eye on it however you should to.

    But remember that buying DeFi is risky: impermanent losses, project hackings, Oracle bugs as well as volatility of cryptocurrencies – these are the problems DeFi yield farmers face constantly.

    Holders of cryptocurrency have a very choice between leaving their own idle in a wallet or locking the funds in a smart contract as a way to bring about liquidity. The liquidity thus provided enable you to fuel token swaps on decentralised exchanges like Uniswap and Balancer, or to facilitate borrowing and lending activity in platforms like Compound or Aave.

    Yield farming is actually the method of token holders finding means of utilizing their assets to earn returns. Depending on how the assets are utilized, the returns might take different forms. For instance, by in the role of liquidity providers in Uniswap, a ‘farmer’ can earn returns as a share of the trading fees each and every time some agent swaps tokens. Alternatively, depositing the tokens in Compound earns interest, because these tokens are lent out to a borrower who pays interest.

    Further potential

    But the potential for earning rewards doesn’t end there. Some platforms provide additional tokens to incentivise desirable activities. These extra tokens are mined by the platform to reward users; consequently, this practice is known as liquidity mining. So, for instance, Compound may reward users who lend or borrow certain assets on the platform with COMP tokens, which are the Compound governance tokens. A lender, then, not merely earns interest but also, furthermore, may earn COMP tokens. Similarly, a borrower’s interest rates may be offset by COMP receipts from liquidity mining. Sometimes, including if the price of COMP tokens is rapidly rising, the returns from liquidity mining can greater than make amends for the borrowing interest rate that you will find paid.

    If you’re prepared to take additional risk, you can find another feature that enables even more earning potential: leverage. Leverage occurs, essentially, whenever you borrow to take a position; for example, you borrow funds coming from a bank to get stocks. Poor yield farming, an example of how leverage is made is that you simply borrow, say, DAI in the platform like Maker or Compound, then use the borrowed funds as collateral for further borrowings, and do this. Liquidity mining could make vid lucrative strategy when the tokens being distributed are rapidly rising in value. There is certainly, needless to say, danger until this does not occur or that volatility causes adverse price movements, which would result in leverage amplifying losses.

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