DeFi or decentralized finance is undoubtedly one of the hottest areas in cryptocurrency in recent times. Now, in the world of decentralized finance yield farming has become the hottest trend. DeFi yield farming has taken the entire ecosystem by storm since the previous year. It offers the investors a reward when they lock their crypto holdings in a decentralized finance market. Let us dive a bit deeper into the topic for a better understanding of the working procedure of DeFi yield farming, its benefits, and other details.
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What is DeFi Yield Farming?
Yield farming is a process that allows earning of rewards with cryptocurrency holdings. The cryptocurrency holders lock their holdings and earn rewards with them. DeFi yield farming refers to the lending of crypto assets within DeFi protocols for producing high returns in interest, incentives, or additional cryptocurrency. The term farming here implies the high interest produced through the liquidity of various protocols of DeFi. In addition to the rewards, DeFi protocols issue tokens. These tokens represent the share of every user in the liquidity pool which can be moved to other platforms for the purpose of enhancing potential gains.
Yield farming is something that proves to be quite beneficial to both lenders and borrowers. In this regard, the borrowers looking forward to margin trading and the lenders looking forward to investing their crypto assets lying idle in their wallet for passive income generation, a liquidity pool can prove to be extremely valuable. In a decentralized finance ecosystem, the yield farmers play the role of banks for lending funds to use tokens for yielding maximum returns. The ecosystem runs via blockchain-based smart contracts that help to connect the borrowers as well as the lenders and at the same time taking care of the rewards of the investors.
Important Terms to Understand Prior to Starting DeFi Yield Farming!
Here are some important terms associated with DeFi yield farming that is essential to know before starting.
Liquidity – It refers to the conversion of assets into cash. At the time when assets are either bought or sold, the crypto market becomes highly competitive across the globe.
Liquidity Pool – It refers to the pools of assets or tokens that offer much better returns to users as compared to the money markets. Smart contracts help in carrying or locking up the assets for easy facilitation of trading via high liquidity provision. These pools are of great help in various different platforms for the purpose of offering the required liquidity in different cryptocurrencies. Liquidity providers are required by liquidity pools for functioning in the right manner.
Liquidity Providers – They stake their holdings in liquidity pools for the purpose of receiving rewards that are generated by the DeFi platform. These rewards come from the fees generated by the DeFi platforms. There are some liquidity pools that pay their rewards in the form of multiple tokens. These tokens are then deposited to other liquidity pools with the aim of earning additional rewards. There are a number of DeFi platforms such as Balancer, Uniswap, etc. are considered to be the most extensive liquidity pools. They offer rewards to the liquidity providers for the addition of their assets to the pool.
Liquidity Pool Providers – Without liquidity providers yield farming is not feasible. The users who invest their assets or lock their deposits in the pool of funds are referred to as the liquidity providers. They are also referred to as the market makers since they supply the buyers and sellers with what they need to trade. The assets present in the liquidity pools are lent with a smart contract. It is precisely where the buyers & sellers agreement is coded and opened in the decentralized finance blockchain platform.
Steps to Start DeFi Yield Farming!
If you are new to DeFi yield farming, here are a few steps that you need to follow.
- Start with choosing an exchange and a liquidity pool.
- Get the crypto required for the chosen pool. The users can also trade other cryptos for it on the exchange’s site and they can also buy it on any one of the major crypto exchanges.
- In the next step, it is required to connect the wallet to the exchange. Each of the exchanges has a button that can link the wallet and deposit crypto with just a click.
- Now, go to the preferred pool and click on the button that adds liquidity.
- Finally, decide the amount of crypto to deposit and approve the transaction.
The most important step here is choosing the exchange and the liquidity pool. It is to be made sure that a trusted, reputed, and reliable crypto exchange is chosen. In addition to this, the choice of the right crypto is a matter of great importance. It is true that you would be earning interest on the chosen crypto but everyone would still want to choose crypto that has a good growth potential that would not crash in value in the near future.
Benefits of Investing in DeFi Yield Farming.
If you are still hesitating to invest in DeFi yield farming, it is time to stop hesitating and start investing. The yield farming credit markets offer a wide array of strategies for the crypto owners to earn highly attractive returns on their cryptocurrency holdings that are at least a hundred percent more as compared to the return offered by any traditional bank. Yield farming also offers higher gains as compared to almost any other traditional channel of investment ranging from real estate to stocks and bonds. The yield farmers can also earn higher returns with liquidity mining. They receive tokens from the company that borrows their funds, in addition to the high interest on their loan. Thus, the yield farmers’ can be classified into three major categories.
- Income from transaction fees
- Token rewards from companies
- Capital growth
Now, it is clear to understand why investing in DeFi yield farming would be a very good idea.
Future of DeFi Yield Farming?
DeFi yield farming has already been booming in recent times. With more and more investors, it is further on the rise without any intention of slowing down in the time to come. Hence, it becomes quite clear that the scope of DeFi yield farming is huge which in turn has the potential of generating a good amount of profit for the users.