Along with the strong development of DeFi is a huge influence of Yield Farming, a form of crypto lending that brings high profits. So, what is Yield Farming that has created such a big buzz in the world of crypto?
Let’s find out in the following article.
What is Yield Farming anyway?
For farmers, “yield” is a concept used to measure the total yield of agricultural products that they have harvested. And in Defi, the farmers are the users and “yield” – the yield obtained here is the increasing interest on the original assets they deposit for the Defi platform.
For example: When you deposit TRON as collateral on the DeFi JUST platform, you will receive virtual currency USDJ.
To put it more clearly, Yield Farming is a method of earning interest and transaction fees on the DeFi platform. An investor depositing into the liquidity fund of a coin pair receives a portion of the fee when the user converts those two units.
Basically, a liquidity pool is a smart contract that contains coins/tokens in it.
In return for providing liquidity, the Liquidity pool will receive a reward (token). That reward could come from transaction fees generated by the basic DeFi platform or some other source.
This chain is also quite complicated, for example, if you have a COMP token, you can send COMP to another DEX exchange, e.g. BAL, to receive a certain percentage reward. And of course, you can use that reward to send to another exchange with the same process to receive other rewards.
All of this is done on Ethereum’s ERC-20 platform, and the reward is usually an ERC-20 token as well. However, this could change in the future.
DeFi Lending and Liquidity Pool
Yield Farming and DeFi open many new doors for investors and their capital to enter the market. Why?
Firstly, let’s take the general economic situation around the world under consideration. Rising inflation, as well as interest rates on loans and savings, make it imperative for major investment funds in the world to find new means of investment to make profits and fight inflation.
With DeFi Lending, you will enjoy a relatively high-interest rate. Depending on the pool or floor, you can enjoy a much higher interest rate than a bank savings interest rate (US deposit interest rate is now 0.1% / year). This is much higher than the bank deposit rate, making many people willing to deposit money into DeFi just to receive interest.
Second, with Yield Farming, in addition to the other interest rate, farmers also enjoy the Liquidity Pool interest, also known as “compound interest”.
Sounds a bit confusing, right? Basically, with DeFi Lending, you will lend directly among users, eliminate intermediaries, and therefore enjoy higher interest rates.
So who will pay you? In this case, the person who is paying you is the one who borrows money from the system (actually borrowed money from you). With a full amount of money in your wallet, you can completely borrow money through DeFi platforms without having to worry about any complicated confirmation procedures.
But if there is money available, why do we still need to borrow? Many people borrow money/assets for such purposes such as Trade (for example, if you want to short ETH, you can borrow ETH and sell it, when the price goes down to buy ETH back to make a difference). Many Holders want to both hold coins and trade the market.
So far reading this, if you are thinking about a giant bank, then you are getting it! DeFi is a giant bank that lends, borrows, provides capital … for users to run automatically, without anyone taking control of it.
However, there is a “small” factor that needs to be taken under consideration: Money. Running a bank requires a lot of money. A lot!. And in the financial industry, the concept of money available to do anything is called “Liquidity” or “Liquidity”. For DeFi, those who provide liquidity to the market are called “Liquidity Pools”.
“Liquidity pool simply means that a smart contract contains money in it. These pools allow users to borrow, lend, or exchange tokens. ”
In Liquidity Pools, there are lots of Liquidity Providers. They are the ones who throw money into the pool for you to borrow, to receive interest. Some Pools give high interest, others give low, depending on the market conditions.
Throwing money into a pool and for interest, is called Yield Farming. However, Compound (COMP) has taken this to new heights.
Yield Farming and Liquidity Mining
In essence, Yield Farming is the process in which users put money into the Pool to receive interest. However, Compound has raised the bar for Yield Farming by introducing Liquidity Mining.
Liquidity Mining is the cycle where Yield Farmer gives liquidity to Compound’s Pool, at that point they will get more COMP tokens.
With ordinary Yield Farming, farmers will gain interest while giving liquidity to the Liquidity Pool. While with Liquidity Mining, when external users get revenue, they will receive COMP tokens, for a much higher interest rate. Every day, Compound’s framework will “look into” the entire account, see how much someone has borrowed from the system, how much liquidity has another provided to the system, then send each person a part of COMP corresponding to their contributions.
How to profit from Yield Farming – specifically from Uniswap?
There are 2 ablest ways to make money based on this lucrative DeFi trend.
The first is utilizing Yield Farming/Liquidity Mining.
As I have mentioned, Yield Farming/Liquidity Mining is not simple in any way. Moreover, it additionally needs a huge measure of cash-flow. Generally, Yield Farming/Liquidity Mining is focused on the Whales/Funds, who have a capital of no less than $ 1 million as opposed to retail financial backers.
Be that as it may, numerous retail financial backers promptly followed the water and profit from DeFi, on account of one basic act: Invest in new DeFi projects, regularly projects on Uniswap – which is the second method to benefit from Yield Farming.
Apparently, Uniswap resembles a typical trade, with candles and volume, and so forth. From that point onward, there will be a “swap” between coin An and coin B. No order book, no pending orders. Uniswap is only an intermediary.
It looks adequately straightforward, yet Uniswap has carried an immense change to the whole market:
- First, Uniswap eliminated conventional Orderbooks, for example, Binance, Bitmex, and supplanted them with the Automated Market Making (AMM) model. With this methodology, joined with the decentralized DEX highlights, Uniswap takes out the vast majority of the issues related to Market Manipulation (control of costs on the trade).
- Second, Uniswap’s ANM is basically shaped on the liquidity of the Liquidity Pool. On account of Uniswap, the Liquidity Pools find a new line of work. (We will discuss the working model of Uniswap and Sushi Swap in the accompanying area). Uniswap is additionally a DEX, working all together for the local area (The organizer of Uniswap has positively no pay from the trade, and Uniswap doesn’t give coins). Subsequently, the “decentralization”, just as the “go-between” of Uniswap, is generally high, adding to the new capital inflow to the market.
Yet, there are still many issues within Uniswap. The principal issue of Uniswap is the high exchange expense, 0.3%/exchange. The second issue of Uniswap is that it just backs ERC20 tokens (running on the Blockchain of ETH). What’s more, the last huge issue is that with Uniswap the LPs possibly acquire the pool’s exchange expenses when they are effectively giving liquidity to that pool. Whenever they have removed their stakes, they will presently don’t get that easy revenue. Moreover, as Protocol acquires a foothold, regardless of being an early liquidity supplier, they risk-benefit weakening as partners (bigger and more extravagant) like endeavor reserves, trades, mining bunches get Protocol together with immense capital.
Through this article, we have learned an overview of one of the most popular keywords today – “yield farming”.
Although the short-term profit that yield farming brings is very attractive, there is a chance this will only be a passing trend. Thus, the creators in the DeFi space need to have more pragmatic, realistic features in their products to associate with the users’ daily life.
Hopefully, we can witness yield farming further bloom, not only in the crypto world but also in the traditional financial flows in the future.