Check out this guide to explore the Yield Farming or crypto lending phenomenon that is giving unlimited excitement to hodlers in the DeFi world.
When Satoshi Nakamoto invented Bitcoin (BTC), the world's flagship cryptocurrency, his main goal was to create a decentralized monetary system that enables the masses to become their own banks. Now, ten years later, cryptocurrency has evolved into an ecosystem that is more than just Bitcoin. In this article, we will try to demystify profitable farming or crypto-lending, the hottest meme bringing unlimited excitement to the "residents" in the world of Decentralized Finance (DeFi)
For the uninitiated, Yield Farming is simply a way to make cryptocurrencies work and earn decent to outrageous returns from your holdings. In other words, crop farming allows smart crypto holders to lend their crypto assets to DeFi platforms such as Compound (COMP). Aave... or centralized platforms like Nexus, and generate huge returns from their crypto assets in the form of interest and sometimes commissions.
For those who don't know, decentralized finance or DeFi is simply an ecosystem made up of decentralized applications (dApps) that are designed to drive financial inclusion. It allows anyone with an internet connection and a smartphone or PC to access a wide range of financial services, including margin trading, crypto asset exchanges, algorithmic trading, and more.
It's worth noting that this is one of the most serious and first major use cases for DeFi. The reason lies in its ability to enrich farmers with huge interest rates, often 100 times higher than what can be obtained in traditional bank savings accounts.
How Yield Farming works
The main approach to pharming is to provide your crypto assets like Tether (USDT) or DAI stablecoins to a DeFi money market like Compound or Aavewhich in turn will provide digital assets to borrowers, who often use them for various purposes, including speculation, then paid to lenders on the platform.
Interestingly, interest rates are not fixed. They are a function of supply and demand for liquidity. However, in addition to receiving interest, Compound farmers receive a reward from Comp in the form of an internal dApp token for their participation (lending or borrowing) on the platform.
Providing capital to these DeFi money markets in the form of lending is the easiest way to earn interest on your digital assets. Interest rates for each digital asset vary from platform to platform.
For example, the 30-day average lending rate for DAI on Compound is at 1,59 percent at the time of this writing, while on Aave it is at 5,35 percent, as seen in DeFi Rate.
Compound, Aave and a host of other DeFi money markets use excess asset collateral to maintain balance on their platforms. Over-collateral simply means that before a borrower can borrow funds on the platform, he must deposit at least 2 times the amount he intends to borrow.
When the collateral ratio (value of collateral deposited / value of received loan) falls below a certain level, collateral is automatically liquidated through smart contracts and paid to lenders. This nifty feature ensures that lenders do not lose their funds even if borrowers are unable to repay their loans.
Liquidity pools
Another way that smart people can engage in Yield Farming is by placing crypto assets in liquidity pools. Uniswap и Balancer are among the three largest liquidity pools in the DeFi ecosystem... In terms of liquidity pools, liquidity providers (LPs) are rewarded for listing their digital assets on the platform.
В Uniswap liquidity pools are configurable between two crypto assets at a 50-50 ratio, and Balancer maintains up to eight different digital assets in its liquidity pool with configurable distributions across all assets. Every time a trader trades a digital asset on exchange platforms like Uniswap, LPs earn a commission.
Anyone can become a liquidity provider at Uniswap and start making money in a few simple steps.
Risks
Typically, investment vehicles that offer a juicy return on investment (ROI) often come with a significant level of risk, and Yield Farming DeFi is no exception. The world of decentralized finance and distributed ledger technology, in general, is rapidly gaining momentum around the world, but the fact remains that the industry is in its infancy and is still struggling to find its place.
DeFi protocols are based on smart contracts, and as such, there are bound to be bugs and loopholes exploited by attackers from time to time. There is also a risk of liquidation as crypto assets can lose their value at any moment, regulatory issues – some crypto assets are still labeled as unregistered securities by regulators.
In conclusion, while farming is currently one of the hottest trends in crypto, newbie farmers should tread carefully and avoid investing more than they can afford to lose. For those who are just interested in making decent money from their stablecoins, money markets like Compound and others are the way to go. Liquidity pools are ideal for crypto big whales who are willing to take risks and earn good rewards, as well as incentivize their crypto assets.