- Yield farming is the process of lending, borrowing, staking, or providing liquidity to DeFi platforms to earn rewards.
- There are three main types of yield farming strategies: lend and hold, yield optimization, and farming governance tokens.
- When choosing a yield farming service, it is important to consider the platform’s security, APY, liquidity, tokenomics, and audits.
- It is important to diversify your yield farming investments, do your research, stay informed, and start small.
- Some key yield farming terms include yield, APY, staking, liquidity provision, impermanent loss, and governance tokens.
Seriously, there are several ways to make passive income or even a living in the world of Defi and blockchain.
Today, we will be going over one of the most exciting examples of this:
In a way, yield farming sounds both complicated and simple at the same time. And in this article, we will be going over everything you need to know to become a successful yield farmer.
What is Yield Farming, and How Does It Work?
Take a moment to think of this:
Imagine you have a garden, and in that garden, you grow fruits and vegetables. Now, the thing about fruits and veggies is that apples may be more popular than watermelons, which are in turn more popular than bananas.
It is safe to say that some fruits may end up easier to sell and make money from than others.
In the case of yield farming, these “fruits and vegetables” are cryptocurrencies.
To put things simply, yield farming is one of the surest ways to make the most of your crypto holdings by lending, borrowing, staking them or using them to provide liquidity on DeFi platforms.
When you deposit your cryptocurrencies on these platforms, you earn rewards in the form of interest, fees, or governance tokens.
These rewards are what we call “yield.”
How Investors Make Passive Income Using Yield Farming
Pay attention to this part. Here are a few methods that most yield farmers use to make passive income with their crypto, and how you can as well.
- Lending and Borrowing
DeFi lending platforms allow users to lend their crypto assets to others in exchange for interest.
To lend your crypto assets on a DeFi platform, you will need to create an account and deposit your assets into the platform’s lending pool. Once your assets have been deposited someone else might borrow them, and you will begin to earn interest (based on how much you deposited).
Good examples of these platforms are Aave, Compound Finance, Nexo and Celsius.
Staking basically involves locking up your crypto in a particular network, to help it secure and validate transactions.
Not only is staking a good way to save money, but you also get small amounts of free crypto in return for staking your assets, depending on how much was staked.
Good examples of staking platforms to check out include Lido, Coinbase and Binance.
- Liquidity Provision
Liquidity provision involves depositing assets into liquidity pools on decentralized exchanges (or DEXes).
DEXes use these Liquidity pools to provide trading, buying and selling features to customers. And as a reward for helping out, you also get a share of the platform’s trading fees.
Good DEXes to check out include Uniswap, Pancake Swap and Sushi Swap
- Yield Optimizers
Yield optimizers are combinations of all of the above.
They are basically DeFi platforms that automatically move your assets between different opportunities, to get the best yield.
Good examples of Yield Optimizers to check out include Yearn Finance and Beefy Finance.
What To Look Out For When Choosing A Yield Farming Service
This is the crypto market. Also known as the “financial wild west”, and home to some of the most clever scams and security exploits ever performed.
Here are a few things to consider when venturing into yield farming.
This is likely the most important aspect of all.
Look for platforms with a strong track record of security and a team of experienced developers. You can also check to see if the platform has been audited by a reputable firm.
- Annual Percentage Yield (APY)
What’s an investment without returns?
APY is the interest rate that you will earn on your investment over one year. I
Try comparing the APYs offered on different platforms before you choose one, and always do your research before choosing.
Liquidity refers to the ease with which you can deposit and withdraw your assets from a platform.
Choose a platform that offers good liquidity and low fees, and you should be fine.
Tokenomics simply refers to how much of a platform’s governance token is available and circulating.
Some platforms use their governance tokens to reward users, while others use them to give users a say in the governance of the platform. Always understand the tokenomics of a platform before you invest.
An audit is a review of a platform’s software by a third-party firm. Always choose a platform that has been audited by a reputable firm.
Different Types of Yield Farming Strategies
Let’s go over some strategies that investors use to make passive income using yield farming.
- Lend and Hold
This is by far the easiest strategy and is the safest method for beginners and for those who want a low-risk way to earn passive income.
Simply lend your assets to a DeFi platform and earn interest from it.
- Yield Optimization
This strategy involves using automated tools like Yearn Finance to move your assets between different opportunities to get the best yield.
Yield optimizers typically use strategies like lending, liquidity provision, and yield farming to do all the work for you.
It is a relatively more complicated strategy and is only recommended for experienced yield farmers.
- Farming Governance Tokens
This strategy involves staking your assets to earn governance tokens.
Despite the risk of Governance token values being volatile, it can also be a very rewarding strategy, as governance token holders often receive special benefits from the platforms that issued them.
Tips for Successful Yield Farming
That was a lot of information to take in all at once. However, what has to be done, has to be done well.
Here are a few ways to make the most of your yield farming adventures:
This is very important. Don’t put all your eggs in one basket. Spread your assets across different strategies, platforms, and assets. This will help to reduce your risk if one platform is hacked or goes out of business.
- Do Your Research
Before you invest in any yield farming platform, always do your research. You should also read the platform’s documentation, track record and audits if you have to.
- Stay Informed
The crypto space is constantly evolving. Always make sure to stay informed about the latest developments so that you can make informed decisions about your investments.
- Start Small
This is important too. When you are first starting out with yield farming, it is best to start small. This will help you to minimize your risk and to learn the ropes before you invest more money.
Glossary of Yield Farming Terms
1. Yield: The income or rewards generated from yield farming.
2. APY: Or Annual Percentage Yield, a measure of the return on investment.
4. Staking: Locking up cryptocurrency to support a network and earn rewards.
5. Liquidity Provision: Supplying assets to decentralized exchanges for trading.
6. Impermanent Loss: The temporary loss that can occur when providing liquidity to pools.
7. Governance Tokens: Tokens that grant holders voting power in the governance of a protocol.
Yield farming is an exciting and potentially lucrative venture in the world of cryptocurrency.
By understanding the basics, choosing platforms wisely, and staying informed about the risks and rewards, you can make the most of this innovative financial opportunity.
Just like tending to a garden, yield farming requires care, diligence, and a bit of luck to reap the best rewards.
Disclaimer: Voice of Crypto aims to deliver accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.