Yield Farming Role in Cryptocurrency | DeFi Pros & Cons
The DeFi world is complex, but some users have learned tactics like Yield Farming to generate cryptocurrency as much income as possible. Yield farming is a process of decentralized finance (DeFi) to earn rewards and interest by depositing cryptocurrency into a pool with other users.
Yield farming is a risky and volatile strategy of DeFi that has skyrocketed in popularity thanks to further innovations like liquidity mining. It is the most significant growth driver of the DeFi sector, helping to propel it from a market cap of $500 million to $10 billion as of 2020.
In short, yield farming protocols encourage liquidity providers to stake crypto assets into a trendy contract-based liquidity pool, which may be the percentage of transaction fees from governance tokens. Participating in yield farms risks losing your entire investment. For investors who prefer aggressive returns, yield farms can offer the highest interest rates, such as up to 100%.
How Does Yield Farming Work?
Yield farming works like a savings account where investors deposit money in a decentralized application, such as crypto wallets, DEXs, decentralized social media and more. But despite being converted into a mortgage, yield farm invests your cryptocurrency into smart-contract applications. These applications then collect depositor money and lend it when you earn interest on your deposited funds.
Usually, yield farmers use decentralized exchanges to lend, borrow or stake cryptocurrency to earn money and speculate on price swings. Staking may require farmers to leave their funds invested for a specific time. As collateral, cryptocurrency provides liquidity to mining pools based on investing.
Also, Read What Is a DApp or Decentralized Application?
Yield Farming Steps
The yield farming system starts with the development of a cryptocurrency asset pool, and the following steps arise to facilitate it.
- The first step is to build a liquidity pool, which depends on an intelligent contract facilitating all investment and borrowing for this specific yield farm.
- In the next step, investors connect their digital wallets to deposit currency in a liquidity pool, and the process is also known as staking. It is like customers Depositing in a bank or investing in EFTE.
- In the 3rd step, smart contracts facilitate various processes, such as adding liquidity to a cryptocurrency exchange market or lending to others.
- The final step is interests, bonuses, and rewards that may differ depending on the yield farm.
Yield Farming Protocols
Yield farming uses specific cryptocurrencies that allow participation, which has its own rules and protocols. The following are yield farming providers with unique offerings.
Curv is the largest DeFi platform that provides a list of stablecoin pools with better APRs tied to fiat cash. Curve raises its APRs from 1.9% to 32%, making greater use of locked funds than other DeFi platforms. Besides, curve finance has its token, CRV, for governance for the curve DAO.
Aave is a widely used stablecoin farming platform, with up to $14 billion in value locked up and $3.5 billion of market worth. With this platform, you can connect your wallet to stake-supported currencies, like Ethereum_Ethereum-based cryptocurrencies are top of the list of assets and liquidity on Aave.
Uniswap is a DEX system of frictionless nature that allows token exchanges with no trust. Liquidity providers invest the equivalent of two tokens to make a market, and the traders then trade against the liquidity pool. In return, liquidity providers earn fees from trades occurring in the wallet.
PancakeSwap works like Uniswap, but it executes on the Binance Smart Chain (BSC) rather than on Ethereum. It provides BSC token exchanges, interest-earning staking pools, NFTs, and gambling games in which users guess the future price of Binance coins. Further, it has its token, CAKE, which you can use on the platform.
Pros & Cons of Yield Farming
There are many advantages and disadvantages of the system yield farming.
- It comes with the potential to earn high rates of up to 100% APY.
- Its smart contracts allow anyone to participate with a compatible cryptocurrency wallet.
- It enables innovative financial outcomes across international boundaries.
- If the value of cryptocurrency goes down, you may face risks of impermanent losses.
- With this system, you can also face evil characters who steal funds through fraudulent yield farms.
- Cryptocurrency transactions need complex tracking, but yield farming adds to that challenge.