Facts You Should Be Familiar With

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31 March 2022

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Decentralised finance (DeFi), a growing financial technology that aims to get rid of intermediaries in financial transactions, has exposed multiple avenues of capital for investors. Yield farming is a such investment strategy in DeFi. It requires lending or staking your cryptocurrency coins or tokens to acquire rewards available as transaction fees or interest. That is somewhat similar to earning interest from your bank account; you happen to be technically lending money on the bank. Only yield farming may be riskier, volatile, and complicated unlike putting money in a financial institution.

2021 has become a boom-year for DeFi. The DeFi market grows so quickly, and it is even hard to follow any changes.

Why's DeFi so special? Crypto market provides a great possiblity to enjoy better paychecks in lots of ways: decentralized exchanges, yield aggregators, credit services, and even insurance - it is possible to deposit your tokens in all these projects and acquire an incentive.

Though the hottest money-making trend has its tricks. New DeFi projects are launching everyday, rates are changing all the time, some of the pools disappear - and it's really a major headache to maintain tabs on it but you should to.

But remember that purchasing DeFi can be dangerous: impermanent losses, project hackings, Oracle bugs as well as volatility of cryptocurrencies - necessities such as problems DeFi yield farmers face continuously.

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

Yield farming it's essentially the technique of token holders finding means of using their assets to earn returns. For that the assets are widely-used, the returns might take various forms. As an example, by in the role of liquidity providers in Uniswap, a ‘farmer’ can earn returns available as a share of the trading fees each and every time some agent swaps tokens. Alternatively, depositing the tokens in Compound earns interest, as these tokens are lent to a borrower who pays interest.

Further potential

Nevertheless the prospect of earning rewards will not end there. Some platforms offer additional tokens to incentivise desirable activities. These extra tokens are mined by the platform to reward users; consequently, this practice is referred to as liquidity mining. So, by way of example, Compound may reward users who lend or borrow certain assets on their own platform with COMP tokens, what are the Compound governance tokens. A lender, then, not just earns interest but in addition, furthermore, may earn COMP tokens. Similarly, a borrower’s interest rates could possibly be offset by COMP receipts from liquidity mining. Sometimes, for example in the event the value of COMP tokens is rapidly rising, the returns from liquidity mining can over compensate for the borrowing rate of interest that has to be paid.

If you're prepared to take additional risk, there is another feature which allows more earning potential: leverage. Leverage occurs, essentially, once you borrow to take a position; for example, you borrow funds from your bank to purchase stocks. While yield farming, a good example of how leverage is made is that you borrow, say, DAI inside a platform including Maker or Compound, then use the borrowed funds as collateral for further borrowings, and do it again. Liquidity mining could make video lucrative strategy once the tokens being distributed are rapidly rising in value. There is certainly, naturally, the danger that does not happen or that volatility causes adverse price movements, which may lead to leverage amplifying losses.

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