What is DeFi Yield Farming? – A Complete Guide for Beginners

What is Yield Farming? 

In the Crypto World, Yield Farming is a process by which one can earn additional rewards on your crypto holdings or in the form of additional cryptocurrency. By staking your cryptocurrency wallet, you can get rewards in the form of cryptocurrency. DeFi Yield Farming is related to the idea of cryptocurrency staking, which rewards crypto capital investments.

The evolutionary process has rendered all industries and businesses unavoidable. The rate of new developments and technologies in a field, which help the economy grow, determines that field’s growth rate.

We are about to discuss yield farming, one of the most exciting terms in the DeFi world.

Let’s use our formidable grasp to glide further into the trendiest topic in the crypto world, “DeFi Yield Farming.”

What is DeFi Yield Farming? 

Decentralized Finance, or DeFi for short, is just an open-source protocol that offers permissionless and quick financial services. It is the process by which people add volatility to open-source DeFi protocols in exchange for rewards.

This refers to the process of yield farming conducted on and on networks built with DeFi protocols and that offer native DeFi tokens for that platform.

Since late 2020, DeFi has been a popular business topic, and right now, this is shining brightly in each and every story of current cryptocurrency news.

This demonstrates how DeFi Yield Farming has located crypto experts and will hasten their transition to the next stage of the cryptocurrency market.

Describe Liquidity 

Liquidity generally refers to an asset’s capacity to be converting into cash. A market in the cryptocurrency world grows competitive whenever an investment is purchased or sold more frequently. Since buying or selling any asset does not come with a discount or premium, liquidity means that it is easy to enter or leave the cryptocurrency market.

DeFI Liquidity Pools: What are they? 

Smart contracts, called liquidity pools, lock up assets or tokens to make trading more accessible by supplying lots of liquidity. Liquidity pools also referred to as token pools or asset pools, provide users with better returns than money markets but come with certain risks.

The two most widely used DeFi platforms, Uniswap and Balancer, are the biggest liquidity pools and offer liquidity providers rewards for contributing assets to the pool.

DeFi Liquidity Providers: Who are they? 

Without liquidity providers, the yield farming process would not be possible. Liquidity providers are also the people who stake their assets in liquidity pools. By creating a market, this order collection process makes it easier to trade cryptocurrencies. Because they provide the goods and services that purchasers and sellers like to trade, liquidity suppliers are also known as market makers.

What Made is DeFi Yield Farming the Most Popular Topic? 

Similar to how the Yield Farming phenomenon has grown to become a huge topic in recent days, it began as a tiny seed.

The DeFi and the introduction of COMP Token, the native token of both the Compound and attributable to increased liquidity, may be to blame for this sudden interest in yield farming. Through liquidity mining, yield farmers, or LPs, receive new tokens in addition to their regular return.

Compound continues to function as a well-liked DeFi protocol that offers the highest yielding farming and liquidity benefits. This increased interest in yield farming among crypto enthusiasts and increased the popularity of the compound platform.

What Is the Process of DeFi Yield Farming? 

Without the participation of arbitrageurs and liquidity pools, yield farming, also known as adaptive market making, is worthless.

Let’s examine the yield farming process in this section.

Before anything else, the liquidity providers send their resources or assets to the liquidity pool for deposit. Customers or LPs can lend, borrow, or trade their tokens or assets on this liquidity pool’s market. These platforms take fees, which are then distributed based on the liquidity providers’ Percentage of the liquidity pool to the liquidity providers.

On any platform, a high-yield farming method goes like this.

Working, however, can differ depending on the technologies and methods used. Most of the money deposited is in stablecoins tied to the USD. The most popular stablecoins are DAI, USDT, and BUSD.

How the Return Calculated? 

A yearly calculation is used to determine the predicted profits in yield farming. Annual Percentage Rate (APR) and Annual Percentage Yield (APY) is the most critical metrics for calculating returns in yield farming (APY).

The main distinction between APY and APR would be that the former takes compounding into account while the latter does not. Reinvesting profits to increase returns is referred to as compounding.

  1. Annual Percentage Yield (APY)

The annual rate of return assessed to lenders and paid to providers is called yield.

  1. Annual Percentage Rate (APR)

The term “annual percentage rate” refers to the rate of return required by lenders and paid to investors each year. APR and APY are products of legacy markets, so DeFi should devise its own way to determine how much money it makes from yield farming.

Inside DeFi Yield Farming, returns are computed in this manner.

Risks of DeFi Yield Farming

Risks are a part of everything in the universe, including yield farming and life. Due to DeFi’s infancy and complete lack of permission, its products fail more frequently.

As a result, there are risks associated with yield farming using DeFi because it requires depositing money into a smart contract. Two anonymous parties without a centralized authority are involved in this virtual process.

Additionally, the overall financial transaction will be lost if somehow the smart contract codes are missing or discovered to be incorrect. This suggests that the transferred money will be wasted. If the system is shut down, the farmers lose all their assets.

Once the DeFi smart contracts are safe, the risks of yield farming can be stay to a minimum.

Commonly Used DeFi Yield Farming Platforms: 

The DeFi market offers a wide variety of farming platforms and protocols. Each platform has its own set of regulations, risks, and farming techniques that maximize yield.

Here are list of some of the best platforms:

  • Compound Finance

The Yield Farming Ecosystem’s central protocol

A well-liked DeFi-based protocol called Compound lets users borrow and lending assets. Those with an Ethereum wallet would contribute assets to the Compound’s liquidity pools and profit from the rewards.

  • Yearn.Finance 

Yearn.Finance is a decentralized system that periodically rebalances to maximize profit by converting funds to yTokens. Farmers use a platform for lending that automatically selects the most effective tactics.

  • UniswapA

The UniswapA DeFi-based DEX platform, primarily used for yield farming, provides frictionless token swaps.

  • Aave

Aave is a popular way yield farmers borrow money, and the interest rate changes automatically based on the market.

  • Balancer

Because it offers more flexibility in creating liquidity pools, the balancer is a crucial liquidity protocol in yield farming strategies.

There are many more DeFi platforms available on the market that offer services for yield farming. To create your DeFi platform using Yield Farming, you can also get in touch with the top DeFi development company.

The Prospects of DeFi Yield Agriculture: 

The DeFi Yield farming mentioned above provides enhanced yields for their farmers, which attracts countless additional users daily. Thanks to this yield farming process, the DeFi space is moving towards the next stage in the cryptocurrency world.

Future DeFi-based platforms that feature automated yield farming may start to take the cryptocurrency world by storm. This farming yield has inspired many people, and many more will be short.

Let’s get ready for Yield Farming’s robust DeFi environment!

I hope this article has helped you learn more about yield farming and its importance.