Bitcasino World Cup Raffle Campaign - Win the VIP World Football Championship Experience
1.7 k
views

A Complete Guide on How to Farm Yields (Yield farming)

Every crypto user, including the beginner, has met with the word DeFi, an acronym for Decentralized Finance. DeFi consists of an ecosystem of Financial applications developed on top of blockchains. DeFi introduces investors’ aspect, making returns on the value of their assets through yield farming markets.

Yield farming, also known as liquidity mining, is where crypto holders lend cryptocurrencies and get fees and interests as returns in the process. Just like when an individual deposits some amount into the bank’s savings accounts and receives interest, yield farming imposes a similar principle.

Investing in a crypto asset does not qualify as yield farming until lenders lend out and receive interests.

How To Mine Liquidity/ Farm Yields

Use Compound and Aave Money Markets

Compound and Aave are the primary DeFi yield farming protocols. Therefore, to mine liquidity, you first need to deposit a stablecoin to either Aave or Compound money markets.

The Compound money market has a token called COMP. COMP acts as a reward to anyone borrowing or lending in the compounds market. Aave, however, has better returns compared to Compound because it offers borrowers stable rates rather than variable rates. The fixed rates have higher returns when compared to the variable rates.  

DeFi money markets come with the advantages of security against financial risks. The high security comes from the over-collateralization protocols employed in the money markets. Therefore, a borrower will need to deposit many assets that have more value than the loan borrowed.

If the collateralization ratio falls below a particular threshold set at any point, then the collateral is sold, and the lender receives his amount plus interest. Over-collateralization helps to ensure that borrowers will pay the full amount. 

Liquidity Pools

There are three main liquidity pools in DeFi ecosystems: Uniswap and Balancer, and Curve Finance. These pools offer liquidity providers rewards for adding their assets into a pool.

Uniswap can hold two assets at a time, and the proportion of each asset has to be 50%. Balancer, however, has the advantage of allowing up to eight assets in a liquidity pool, all with different ratios. 

How do liquidity providers earn in liquidity pools? Every time an individual trades through the pools, the liquidity providers contributing to the pool receive a small fee. In Uniswap, for liquidity providers to increase their profits, they ought to consider impermanent loss. That is the loss that comes with providing liquidity for a highly volatile asset.

In Balancer, liquidity providers can mitigate their impermanent loss by setting up an 80-20/90-10 allocation. Also, the providers can earn BAL by providing liquidity on a Balancer pool.

Curve finance also helps liquidity providers to eliminate their impermanent losses. That is done by enabling the trading between assets pegged to the same value. A pool deals with USD pegged stable coins, and another deals with stable coins related to BTC. Since the assets are worth the same amount, there is no chance for impermanent loss. Uniswap and Balancer focus on getting higher fee collection, while curve finance eliminates impermanent losses.

Risks Associated With Yield Farming

Highly profitable investments often come with serious risks. The situation is similar in DeFi yield mining. The crypto world is already widely used; however, it still has a long way to go in terms of technology and growth.

DeFi protocols are run by smart contracts and therefore experience the same vulnerabilities seen in the smart contracts. Some of these vulnerabilities include reentrancy attacks, DOS, and gas limits, in which untrustworthy traders can take unfair advantage. 

Liquidation is another risk that vastly affects the crypto market since the crypto assets can lose their value at any time.

The issue of regulation of the crypto asset is also a risk to enthusiasts. Some of the coins in the market are still unregistered as securities in the exchanges. A trader should be aware of the risks in the market and choose to trade cautiously. 

Big players in the crypto market can easily manipulate the market, leading to reduced income for small players. A trader can lend crypto through DeFi and then borrow the crypto back, thus creating a high but artificial demand for the coins. Doing this will, as a result, cause unrealistic price movements in the market.

Final Word

DeFi liquidity mining (yield farming) is the right way for crypto enthusiasts to get returns on their assets’ value. However, since it’s still in the early stages, it has a long way to go in terms of growth and adoption. Although the yield obsession is fun, it may, in the long run, cause damages if not correctly handled. 

Bitcoin live price
Btc
Bitcoin
$20.341
price
1.10268%
price change
BUY NOW

Liquidity pools are a thing for the crypto big whales, who are always ready to take high risks to enjoy even higher returns. When compared to fiat bank savings accounts, DeFi yield farming earns higher interest. Therefore, the yield farming will continue to drive faster crypto adoption.

Stay up to date with our latest articles

More posts

5 Best Crypto Coins for Online Casinos

Playing with crypto at an online casino is an increasingly popular pastime for many cryptocurrency holders or casual players. These web-based platforms function similarly to traditional web-based casinos. However, they allow you to deposit, gain, and withdraw crypto at numerous games, including Blackjack, Roulette, Poker, slots, etc. Some players have problems choosing the best cryptocurrency for an online crypto casino games. As you may know, the crypto market is prone to intense volatility and unexpected turns of events. This means…

What is Web 5? Jack Dorsey’s Alternative to Web 3

On June 10th, Jack Dorsey announced a new project being built by Block’s bitcoin-focused business unit, TBD. That project is known as “Web 5” – a so-called “extra decentralized web” that “puts you in control of your data and identity.” What could the Block Head have in mind with this new creation? Also, what happened to Web 3? A Decentralized Data Storage Solution When Jack Dorsey announced Web 5 over Twitter, he said it would be Block’s “most important contribution…

Top 5 Crypto Portfolio Trackers To Use in 2022

An active cryptocurrency trader cannot do without the support of a crypto portfolio tracker. Not if they want to be successful at trading or investing. A crypto portfolio tracker is an app enabling you to monitor the amount and value of your crypto assets across all wallets, exchanges, platforms, and blockchain networks in real-time. It allows you to track historic transactions, live crypto prices, gains, and losses. Above all, it prevents you from mismanaging your portfolio while getting the best…

Five Gold-Backed Crypto to Consider in the Current Inflationary Economy

Many traders are optimistic about the blockchain's development potential and recognize that volatility is inevitable with new technology. Some are asking how to invest in digital assets while maintaining some degree of stability. A relevant part of investors frequently mentions stablecoins as a valid investment alternative. Anchoring the value of crypto to a fiat currency can undoubtedly sound appealing. However, fiat money depreciates as inflation increases, making stablecoins less valuable. In this particular context, the crypto market is offering a…

What Are the Differences Between Stop-Loss Orders and Portfolio Stop Loss?

In a volatile market like crypto, investors always look for ways to protect their assets. In this market, just like any other, nobody wants to lose money. Consequently, it's essential to introduce a price floor for the value of your assets. These situations can benefit from stop-loss orders or portfolio stop losses. However, some people have trouble figuring out where they should set their prices. If you set them up too far away, you could lose a lot of money…

Can Hackers Steal Your NFTs? Understanding How Criminals Operate

In a world where NFTs are becoming more and more valuable, NFT theft is a real threat. Criminals and technology are evolving, and users need to move with care in this growing market. Our guide will provide more details on this dangerous trend and share guidelines on reducing the risk of NFT theft. Stealing NFTs – Myth or Reality? When it comes to staling NFTs, exploiting human mistakes is the most typical strategy for a hacker. Without the hacker's access…

Ethereum Name Service (ENS) – A Simple Guide

People can choose domain names that are easy to remember for their wallet addresses, thanks to the Ethereum Name Service (ENS). The secret to this technology is using a computer to understand this domain. When it comes to Web3 communication, ENS has the potential to make all the difference. In this guide, we'll go through some possible reasons for this. Ethereum Name Service (ENS) – A Definition To find out what a specific Ethereum address is, people can use the…

A Beginner’s Guide to the Impermanent Loss Phenomenon

Decentralized finance, or DeFi, presents several hazards to investors. Impermanent loss is a significant concern when dealing with this growing market. This guide will explore the meaning of impermanent loss concerning the liquidity pool. Moreover, the guide will also discuss how to calculate the difference and reduce the risk of this phenomenon. Grasping the Notion of Impermanent Loss There is a high probability of impermanent loss in every given situation. A net difference in the value of two tokens in…

NFT Minting – What Do We Know about Its Environmental Costs?

A multi-billion dollar sector was born out of the non-fungible token (NFT) market in 2021. Environmentalists are increasingly alarmed about the ecological impact of this growing sector.  Is NFT minting a cause for concern for our planet's environment? What options do we have in resolving this problem? These crucial questions will be the core of today’s guide. Minting New NFTs Minting, the act of adding a specific item to the blockchain, is similar to producing a physical coin. It has…

Fair Launch vs. Pre-Sale – What Is the Difference?

Every time we see a new crypto project entering the market, we notice different ways to launch a token. One of the teams' most common choices is leaving (or not) access to the token to early investors. In this context, we have all heard about pre-sales and fair launches. These two strategies represent different approaches to the crypto market. Our guide will clarify the main features of the two funding rounds for our readers. Launching a Crypto Project – Preliminary…