In the world of cryptocurrency, when an investor is always looking for ways to increase profits or increase the number of coins he is holding by trading, now there is a fairly new concept to help increase coins that is “Yield Farming”.
If you are new to the cryptocurrency space, let this article be a guide on yield farming to help to initiate your lucrative investing journey!
What is Yield Farming?
Yield Farming, also known as liquidity mining, is a way to generate rewards for holding cryptocurrency. In short, it locks tokens and gets rewarded with tokens. Same as Staking!!!
However, Yield Farming works differently from Staking, it interacts with liquidity providers (LPs) to provide liquidity to the protocol’s liquidity pool.
What is Liquidity Pool?
Basically, an LP is a smart contract that contains a coin/token in it.
In return for providing liquidity, the LP will receive a reward (token). That reward could come from transaction fees generated by the underlying DeFi platform or some other source.
This chain is also quite complicated, for example, if you have COMP tokens, you can send COMP to another DEX like BAL, to get a reward according to a certain percentage.
And of course, you can use that bonus to send through another exchange with the same process to receive another reward.
Understand that for simplicity, but later there will be many cross-platform interactions, then we will learn more, in the immediate future to avoid confusion.
How is Yield Farming’s profit calculated?
Normally, profits from Yield Farming will be calculated on an annual basis, like the interest rate on a 1-year savings deposit. There are two units of profit measurement that you often see are APY (Annual Percentage Yield) and APR (Annual Percentage Rate). APY takes into account compound interest and APR does not. So is there any way to calculate profit from Yield Farming in short term?
It is actually quite difficult to estimate the profit from Yield Farming because it is a highly competitive campaign and many innovations as projects try to attract investors to provide liquidity into their protocol.
Besides extremely attractive profits, when participating in Liquidity Mining we also need to understand its risks.
The Perks Of Yield Farming
Yield Farming attracted short-term participants quickly because it launched the bootstrapping protocol, which is seen as a new era for DeFi.
Or the birth of Yield Farming also has a strong impact on other protocols, and this impact can let both go up. In fact, there have been many interactions and strong development for both sides.
The two above are all short-term benefits and only exist in the short term.
What Yield Farming benefits from is only seen in the short term, but it is considered to be premature. The main result that Yield Farming should do here is to create the value of its products associated with more real and life benefits. With a great hope that it will not only stop at Crypto but also become a major financial flow in the world in the future.
The Underlying Risks Of Yield Farming
If we don’t really understand how protocols work, the possibility of losing money is VERY HIGH.
Project Scam
These projects often offer very high APY (Annual Percentage Yield) levels, up to several tens to several hundred thousand interest rates, as well as many promises for the future for a huge amount of money. , A GOOD OFFER. Almost all of us want to gamble like that and getting into a scam project is very easily happen if we do not know the rules of the game.
Smart Contract Risks
Most protocols are developed by small teams, which increases the likelihood of bugs in smart contracts (because there is no budget to audit). Audited Protocols are still capable of bugs and stolen money as in the case of Bzrx, Curve…
Impermanent loss
Impermanent loss occurs when you provide liquidity to the Liquidity Pool and then the price of your deposited assets changes compared to when you deposited. The greater this change, the greater the temporary loss.
In this case, the loss means that the dollar value at the time of withdrawal will be less than at the time of deposit, but it should be noted that the temporary loss is only a real loss when you withdraw your LP pair from the Pool.
However, there is no need to worry too much if you choose a good project, the Impermanent loss can still be countered by transaction fees and the part of the token that can be farmed. In fact, pools on Uniswap that suffer temporary losses can also benefit from transaction fees.
Is Yield Farming a “Bomb”?
In the short term, it is undeniable that Yield Farming makes the market boom now more than ever, and especially is helping money flow back into the crypto market because, for the sole reason, profits are plentiful.
You just imagine, just invest, just profit, go farm, earn interest, and also receive valuable tokens, that token increases rapidly, compound interest….helps cash flow from everywhere return to the market. From money sources outside the market or from the top coin holders lying motionless, they must also be shaken.
Since then, there have been many DeFi projects as well as other Yield Farming projects, money can be poured into despite the difficult world economy.
However, it is a game of WHALES, SHARK, etc. And this is the MONEY GAME market, so the boom can explode at any time. Therefore, in the future please be very careful.
Conclusion
I hope the above article has somewhat given you a comprehensive guide to Yield Farming. On the market, there are many DeFi projects that provide Yield Farming features for users, so understanding how Yield Farming works as well as the benefits and risks that it brings will help you to informed investment decisions. High returns will always come with high risks.
Therefore, be alert and consider carefully with your investment capital!
