In the past 10 years, the world has become familiar with the concepts of cryptocurrencies, blockchain technology, and decentralized financial systems. Many investors have earned a huge profit from buying, selling, and exchanging on the decentralized financial system through cryptocurrencies. The recently appeared concept of Yield Farming has created a fever because it helps investors to earn more from the cryptocurrency they own.
Some concepts you need to know when starting Yield Farming
Liquidity Provider: Investors who transfer their cryptocurrency into a DeFi platform to Yield Farming.
Liquidity Pool: The place where the platform keeps the investment funds coming from the Liquidity Providers.
Total Value Locked (TVL): is the investment value that investors are pouring into the liquidity pool. This number represents the health of a decentralized financial platform. The higher the value, the more reputable the platform is.
The profit that investors receive when Yield Farming will be paid in the form of % commission or token reward. Each DeFi platform will accept one or more different cryptocurrencies and come with different tokens respectively.
How Yield Farming brings passive profit to investors?
Yield Farming’s mechanism is that liquidity providers invest cryptocurrencies in the liquidity pool. From there, other users can borrow money from the liquidity pool and pay a fee to the system. The system will use this fee to pay interest to Liquidity Providers or give rewards in the form of tokens. After that, Liquidity Providers can continue to invest these tokens in the liquidity pool or any other DeFi platform for profit. It means you can use your profits to invest to earn more profits.
All transactions will be done via smart contracts. Smart contracts provide Turing Complete programming languages that allow multiple parties to interact with each other without a centralized intermediary. Blockchain’s ability to leverage smart contracts has made them the ideal platform of choice when building financial applications.
This process takes place continuously, quickly, through smart contracts on a decentralized financial platform and brings huge passive returns to investors.
Each platform will have its regulations on transaction costs, percentage of commissions, rewards for investors, collateral for borrowers. Some of the most famous Yield Farming-enabled platforms are Compound Finance, MakerDAO, Synthetix, Aave, Uniswap, Curve Finance, and Balancer.
Positive and Negative Terms
Positive
1/ Huge passive income from farming, tokens help investors not waste the cryptocurrency they own.
2/ Investors earn compound interest from the profits and rewards received from the liquidity pool in the form of reinvestment.
3/ Investors can calculate and estimate the profit received through the Annual Percentage Rate (APR) and Annual Percentage Yield (APY). In which, APR does not include compound interest, but only rate-based interest on the initial investment deposit. APY includes compound interest calculated from both the profit of the tokens, the profit received by the investor.
4/ Decentralized financial system is an open system, without payment intermediaries, but all transactions are done through smart contracts, ensuring transparency and fairness for all users.
5/ Yield Farming is especially suitable for investors who own a large number of stable coins.
6/ The trend of trusting and accepting cryptocurrencies is increasing. Many people are looking for the best ways to invest in this field while the number of cryptocurrencies is limited. Therefore, the lending and borrowing market has the potential to start yield farming right now.
7/ Tokens received are not only for reinvestment on DeFi platforms but can also be easily converted into cryptocurrencies, and of course, you have a huge profit when the value of tokens and cryptocurrencies is increasing.
8/ Investors can Yield Farming with almost all cryptocurrencies.
9/ Many platforms provide services to support yield farming. They have an easy-to-use and friendly interface. Users can choose suitable projects for investment.
10/ Users can easily monitor all market movements of Yield Farming through yield farming platforms. They provide management, monitoring, and notification services to manage users’ investments, loans, or mortgages.
11/ Yield farming has contributed largely to the expansion of the decentralized finance platform market with a value from $500 million to $10 billion in 2020. This affirms that this form of investment is worthy. People expect to develop Yield Farming more in the future.
12/ Current yield farming protocols are mostly implemented on the Ethereum platform. Is a reputable and long-standing network.
Negative
1/ Smart contracts created on decentralized financial platform protocols cannot be modified. It still has a risk of system failure.
2/ Risks when managing collateral for borrowers to invest. Just an unreasonable calculation, it is possible to lose all assets in one trading session.
3/ This is a form of investment that requires complex, fast and diversified strategies to maximize profits. Not entirely suitable for newcomers to the cryptocurrency market.
Conclusion
Thanks to DeFi, yield farming can be just an investment tool, allowing you to earn passive income. In a nutshell, one of the main benefits of yield farming is that it is one of the best alternatives for storing money in a savings account. Yield farming can earn much higher interest rates than traditional banks. Idle crypto holders can also invest their funds in DeFi protocols to earn more crypto, making it a great source of passive income.
As more and more investors pour their crypto capital into platforms that offer returns in exchange for liquidity, yield farming is sustainable and growing. The only challenge that lies before yield farming and DeFi projects is to make the entire ecosystem more secure from hacker attacks and manipulation. If DeFi can improve and secure more, yield farming has huge potential to become the mainstream financials of the next decade.
With this information above, we hope you have had a basic look at what Yield Farming is and why it has such a terrible appeal. If you want to generate passive profits, you can connect with our blockchain and crypto developers at Yield App. We have a team of experienced professionals, ready to help and advise you to get the most valuable investments.
