Yield Farming is the practice of placing your cryptocurrency in the most advantageous location so that it will generate more free cryptocurrency for you. Yield, a phrase used in finance, refers to “your return after investing.” There’s Farming because it symbolizes the potential exponential development you could experience by picking the appropriate investment opportunity. For each $1000 invested, the majority of US banks can guarantee about $1 per year. To put this in context and get you pumped, currently, several well-known yield farming opportunities are offering $3000 per year for every $1000 invested. How is it generating this much?
Currently, cryptocurrency lending and borrowing are fairly new. As a result, many business owners and developers are working incredibly hard to construct the next major bank using blockchain technology. Some of these prospects are receiving absurd amounts of funding, and Yield Farming is essentially deciding where to invest your funds to get the biggest return. There are many various ways to accomplish it and here are some approaches to achieving that.
As was explained by the Liquidity Pool article, being a Liquidity Provider gets you rewarded. Coins and tokens can be supplied by investors to a decentralized exchange. In turn, the exchange returns to the investors a very modest percentage of all trades made on the platform. An investor may see a very large return on their initial investment if there are a LOT of trades going on and they are one of a select group of investors. If you had $1,000 to invest, for example. You contribute $500 in Ethereum and $500 in BAT to a Uniswap liquidity pool. Uniswap is a decentralized exchange that utilizes the Ethereum network. Because some other investors put in $99,000 before you, and now that you have contributed $1,000, the total investment is $100,000. This indicates that you now own 1% of the entire pool. The following day, around $1,000,000 worth of transactions occur between ETH and BAT on Uniswap, with a .3 % transaction charge. This indicates that $3000 was earned throughout those trades. You made $30 in one day because your share of those fees is $30. Another significant decentralized exchange, Pancakeswap, operates on the Ethereum-like Binance Smart Chain but currently charges cheaper gas fees. Yet, another significant player that enables you to exchange your Matic tokens is Quickswap.
When it comes to yield farming, borrowing and lending play major roles, and there are numerous ways to make money using these methods. Many lending and borrowing platforms will pay benefits to users who lend them cryptocurrency. Compound and AAVE, for instance, display their lending rates in their apps. Some coin rates exceed 30 % APR, while others are almost zero. APR means, Annual Percentage Rate. Since the stock market has historically returned around 7% and many traditional banks only offer .5% APR, anything above this appears like a wonderful alternative to any investor. Additionally, it is incredibly easy to invest and you can withdraw money at any time.
You can profit from borrowing. Think about if you wanted to get a loan but didn’t want to cash out your extra ETH because you believed the project will succeed and its value would increase. You could lock up your ETH as collateral and borrow some DAI, a stablecoin. All loans related to cryptocurrencies are always overcollateralized, which means that to receive a loan, you must contribute MORE funds than the loan is worth. Because there is something of higher worth that you’d rather get back, there is no way you can flee with the money you borrowed. Let’s say you have $15,000 worth of ETH. $10,000 in DAI can be borrowed and used as needed until you decide to return it; there will, of course, be interest, which you should pay back gradually. You can return the $10,000 in DAI when you’re ready and receive your ETH, which has ideally appreciated in value. As a result, you were able to use your Ethereum while still letting it appreciate in value. This is similar to taking out a loan on a lot of lands because you can use the funds while the lot is still increasing in value.
Next is Leveraged Lending, which is lending on steroids because you take what you can borrow and reinvest it when you lend your money, then borrow and reinvest it. These platforms enable you to borrow $60 worth of DAI from them if you deposit $100 worth of Basic Attention Token. First off, giving Basic Attention Token has an APR of 30%, so you’re already making passive revenue from it. Although it isn’t usually 30%, the price of BAT is now quite unstable. THEN, you take that $60 of DAI and convert it to Basic Attention Token utilizing a decentralized exchange. Now that you have supplied Compound or AAVE with your $60 Basic Attention Token, you have $160 earning that 30% APR. But now that you’ve added another $60 to your account, you may use DAI to borrow $36. Now you may go buy BAT and deposit it again to repeat the procedure. You currently have over $200 in Basic Attention Tokens generating a 30% APR. So even though you only have $100, you are collecting 30% interest on assets worth $200, and this… this is Yield Farming’s golden goose. There are hazards of course, and the first one you should be aware of is that if the price of Basic Attention Token drops, the platform might immediately liquidate your assets to recoup their losses.
Because you may purchase coins, stake them, and then receive additional free coins, staking is theoretically a type of yield farming. Tezos will be the subject of our first example. Tezos currently has an APY of about 6%, but you need the right equipment and experience to build up a reliable year-round staking node on your own. Staking through a platform like Coinbase, which deducts 6% but still pays you something, is a popular option to avoid this. The following is ETH 2.0. Ethereum is switching from Proof of Work to Proof of Stake, which means that instead of several miners working hard to mine Ethereum, the code is altering such that only one miner will be able to earn Ethereum at a time. You can join the network and try your luck at becoming one of these fortunate miners, and if you do, you’ll get paid in Ethereum. Again, setting up a staking node might be challenging for novices, but services like Coinbase already offer to take care of it for you in exchange for a fee.
Staking LP tokens is the final option. You receive LP tokens when you supply liquidity. For instance, if you use ETH and BAT to give liquidity to Uniswap, you can get some ETH-BAT uniswap token in return. You can exchange these tokens for your portion of the pool’s worth at any time. On many platforms, though, you can stake these tokens to receive interest in them. Because they want to encourage you to leave them alone so that you don’t withdraw your liquidity, and this interest rate accomplishes that goal.
It should be noted that many liquidity pools will provide you with their native currency, like Uni or Cake, as a reward for staking your LP tokens. These tokens are typically inflationary in nature, meaning the platform just keeps generating more and more of them, which usually results in a price decline. This is why a lot of investors advise against buying a liquidity pool token since, in their opinion, the price will eventually drop to zero.
Hold coins that have a redistribution fee. For instance, the transaction fee for the cryptocurrency Safemoon is 10%. The concept behind the 5 % burnoff is to keep Safemoon’s supply constant while also raising the price because there is supposedly always less and less of it available. All other holders receive an equal share of the remaining 5%. Therefore, while everyone else conducts their transactions, you can earn free Safemoon simply by holding the coin. Though nothing like to this has ever been scaled to such a huge market cap before, you must be VERY careful when dealing with a currency like this because of the hazards connected with a deflationary coin. Before buying any coins, do your resh. Even specialists don’t know what will happen in the long run, according to several experts, who claim that Safemoon is a speculative investment because no other cryptocurrency with a transaction cost equivalent to Safemoon has been launched. There is also a yield optimizer called PancakeBunny that leverages the decentralized exchange run by PancakeSwap to reward investors who buy their coins. They have a tool called “AutoCompound” that will automatically add your winnings back to your initial investment so that they start earning. This, in essence, harnesses the power of exponential growth. Although this concept isn’t brand-new, PancakeBunny was among the first sites to gain popularity for it.