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31 March 2022
Decentralised finance (DeFi), a growing financial technology that aims to remove intermediaries in financial transactions, has opened multiple avenues of revenue for investors. Yield farming is a such investment strategy in DeFi. It demands lending or staking your cryptocurrency coins or tokens to obtain rewards in the form of transaction fees or interest. This can be somewhat similar to earning interest from a checking account; you are technically lending money for the bank. Only yield farming might be riskier, volatile, and sophisticated unlike putting take advantage a bank.
2021 has developed into a boom-year for DeFi. The DeFi market grows so quick, and even unpleasant all the new changes.
How come DeFi stand out? Crypto market provides a great possibility to enjoy better paychecks in many ways: decentralized exchanges, yield aggregators, credit services, as well as insurance - you are able to deposit your tokens in all of the these projects and have a reward.
Nevertheless the hottest money-making trend has its own tricks. New DeFi projects are launching everyday, rates are changing all the time, a few of the pools disappear - and it is a major headache to help keep track of it however you should to.
But observe that buying DeFi can be dangerous: impermanent losses, project hackings, Oracle bugs as well as volatility of cryptocurrencies - these are the problems DeFi yield farmers face all the time.
Holders of cryptocurrency possess a choice between leaving their funds idle in the wallet or locking the funds inside a smart contract in order to help with liquidity. The liquidity thus provided enable you to fuel token swaps on decentralised exchanges like Uniswap and Balancer, or facilitate borrowing and lending activity in platforms like Compound or Aave.
Yield farming is basically the method of token holders finding methods for using their assets to earn returns. Depending on how the assets are utilized, the returns might take different forms. By way of example, by becoming liquidity providers in Uniswap, a ‘farmer’ can earn returns as a share of the trading fees whenever some agent swaps tokens. Alternatively, depositing the tokens in Compound earns interest, as these tokens are lent to a borrower who pays interest.
Nevertheless the potential for earning rewards doesn't end there. Some platforms also provide additional tokens to incentivise desirable activities. These extra tokens are mined through the platform to reward users; consequently, this practice referred to as liquidity mining. So, for instance, Compound may reward users who lend or borrow certain assets on the platform with COMP tokens, what are the Compound governance tokens. A lending institution, then, not just earns interest and also, additionally, may earn COMP tokens. Similarly, a borrower’s interest payments might be offset by COMP receipts from liquidity mining. Sometimes, like in the event the valuation on COMP tokens is rapidly rising, the returns from liquidity mining can more than compensate for the borrowing interest which needs to be paid.
If you are happy to take additional risk, there exists another feature that enables even more earning potential: leverage. Leverage occurs, essentially, whenever you borrow to speculate; for instance, you borrow funds coming from a bank to get stocks. Negative credit yield farming, an illustration of this how leverage is created is that you simply borrow, say, DAI in a platform including Maker or Compound, then utilize borrowed funds as collateral for additional borrowings, and repeat the process. Liquidity mining may make video lucrative strategy once the tokens being distributed are rapidly rising in value. There's, naturally, the chance that doesn't happen or that volatility causes adverse price movements, which may cause leverage amplifying losses.
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