What Is Yield Farming? The New Age of Decentralized Finance

The internet brought a lot of new ways of earning money, and when the topic is digital currency, the most common question you hear is, "what is yield farming?"

If you own cryptocurrency, you have probably heard about it, but you may not understand every detail and need some help learning how to profit from it.

Investing in digital currency is a way of earning money without leaving your house or even your bedroom and offers several other advantages.

What Is Yield Farming?

Yield farming is a financial strategy to earn interest from cryptocurrency. Have you ever invested in a regular bank with "real" money and earned interest for keeping it in there? It is the same thing, but in this case, you use digital currency.

The primary difference here is that it does not involve any traditional bank transactions, and everything happens over the internet, more precisely, on the blockchain.

The primary benefit of this strategy is that it results in lower fees and higher interest returns since there is little or no expense with physical matters and employees.

How Does Yield Farming Work?

The first step you need to do to enter the yield farming world is set up a digital wallet and acquire some cryptocurrency.

Then, you have to choose a decentralized finance platform (DeFi) to invest your assets.

DeFis operate in a decentralized way on the blockchain, meaning they do not need a third party (traditional banks) to intermediate the user's transactions. These transactions happen through smart contracts, and no one can alter them once they are created, ensuring the safety of the operation. After setting this, you can lend, borrow or stake your coins or tokens and receive interest in return.

For example, you can lock your assets inside a liquidity pool, and other investors can borrow them. During this time, your coins are increasing (or decreasing) according to the rate of that pool. Everyone who is a part of the pool earns a slight interest reward for participating.

Is Yield Farming Profitable?

Like any other investment, yield farming can be profitable, but your earnings will vary depending on the platform, blockchain, liquidity pool, and rates.

For example, if you lock your assets in a high-risk pool with a more volatile cryptocurrency, your chances are you can earn a lot or lose it all. Therefore, the profit will be proportional to the number of tokens you are willing to invest in and the risks you are ready to take.

If you are only starting, you probably should be careful and not start with high-risk investments. Instead, take your time learning and getting used to the platform and processes.

Is Yield Farming Safe?

As mentioned before, the thing that makes yield farming safe is smart contracts. Every time you lock your assets inside a liquidity pool, there is a code that secures that every part of the deal has been completed. Although, there is the possibility of you investing in a rug pool and the protocol draining the liquidity and rendering your investment worthless.

There is always the chance of impermanent loss if you end up staking your assets and their corresponding rewards drop too much in value. If you decide to withdraw your coins after the value drops, you will not get that amount back, and all you can hope is that you earn something from another pool. Of course, this is a risk on any investment, but it is always a useful reminder.

Another security problem is the platform you choose. So, before putting your crypto anywhere, take some time to research and read reviews about them, so you do not have any nasty surprises like your money disappearing.

What Type Of Cryptocurrency Can I Invest in?

The cryptocurrency you invest in will depend on the platform you choose. Before choosing, look at the tokens supported on that specific dApp (decentralized app). Some protocols encourage using their native tokens, which usually pay out the highest rewards. Sometimes these tokens offer special features, like an internal lottery that can only be obtained with that specific token, increasing the demand and, therefore, its value.

What Are The Best Yield Farming Platforms?

There are many yield farming DeFi apps, but some have been here longer than others and are considered more trustworthy. This does not mean that newer platforms are dangerous, but they have not been here long enough to earn people's trust and prove that they provide a low-risk investment like the other ones.

1. UniSwap

Based on the Ethereum blockchain, this DEX (decentralized exchange) platform allows users to trade ERC-20 tokens. You can earn UNI tokens when you lock your assets in a liquidity pool. This is the most popular DeFi protocol.

2. SushiSwap

Another platform on the Ethereum blockchain, but in this case, you can earn SUSHI tokens in return for lending and staking your crypto.

3. PancakeSwap

This decentralized exchange happens based on the Binance Smart Chain. Therefore you can swap BSC tokens. You can earn CAKE tokens and use them to buy lottery tickets on the dapp and earn extra rewards.

4. Curve Finance

This DEX is known for maintaining low fees for liquidity providers and works mainly with stable assets. Its native token CRV is paired with tokens such as USDT, USDC, DAI, TUSD, and BUSD.

5. Compound Finance

Also running on the Ethereum blockchain, Compound allows users to invest their coins and get rewarded in COMP tokens. It is an open-source protocol, and the rate of rewards will vary on demand.

6. Aave

You can lend, borrow or stake your coins in its liquidity pools and earn rewards, like AAVE tokens. It runs on multiple blockchains, including Ethereum, Avalanche, Polygon, and Arbitrum.

Ready to start investing in yield farming? Now you are well informed and got all your answers to the "what is yield farming?" query and how to operate in this new and already popular way of investing in crypto.

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