The early risers have already established their roots in the DeFi, but it is never too late to start. DeFi has several tools in its arsenal that make it a robust and essential addition to your crypto platform. Apart from the dApps that help bring several financial services to your platform, DeFi Yield Farming has become popular too. In this article, we will discuss everything about DeFI Yield Farming.
What is DeFi?
Decentralized Finance refers to the new era of finance moving away from the traditional finance or centralized finance system to peer-to-peer finance built on blockchain technology. One of the most significant advantages of choosing DeFi over centralized finance is that all financial services such as borrowing and lending can happen using smart contracts omitting the need for a middle man.
Apart from that, DeFi also has other advantages: immutability, permissionless, transparency, programmability with smart contracts, and more. While the crypto world began several years ago, DeFi is a recent addition to the industry.
The adoption of DeFi technology in the crypto world has seen several advancements in recent years. DeFi has revolutionized the way crypto mining works by introducing dApps as a platform to build blockchain networks on. Several marketplaces, such as Zionodes, offer unique DeFi capabilities to blockchain projects to improve their efficiency.
What is Yield Farming?
DeFi yield farming is a relatively known concept which involves using existing crypto assets by lending or staking them to earn new crypto assets. It works in the same way as investing your money to earn interest in the traditional financial system.
However, in the DeFi world, when you put your assets to work, you earn a reward in the form of interests or a fee. This reward varies from project to project and the number of assets you use.
The reward you receive also depends on the protocol of the project you are farming in. However, to have better chances of earning more crypto rewards, users switch from protocol to protocol. This process of leveraging different protocols by investing your existing crypto assets to yield more rewards is called Yield Farming.
Blockchain projects can leverage DeFi applications to yield more benefits by giving liquidity to the platforms. These yields or rewards include the cost of stages, loan fees, and paid tokens. When you store your crypto assets on a platform using smart contracts, they will earn you regular interests over a specific period.
What are the various types of Yield Farming?
Considering the latest advancements in the crypto mining industry, there are now several ways that a user can start farming new protocol tokens. Several platforms such as Zionodes have been developing new efficient ways to farm tokens and maximize yields. Currently, there are two popular types of yield farming known to produce excellent results.
Liquidity mining refers to the process of leveraging one’s own crypto assets to offer liquidity to DeFi exchanges to provide an immediate token exchange for other traders. Earlier, to swap a token, traders had to find another trader willing to make the trade.
However, now using tokens provided by holders as liquidity on these protocols, traders can immediately swap tokens with the highest value. This exchange happens inside the liquidity pool, where several users deposit their assets and grow the pool.
These protocols incentivized asset liquidity by offering providers some fees on every transaction or trade.
Where some protocols offer fees to liquidity providers, others sweeten the pot by providing protocol tokens. Liquidity providers can earn native tokens from the protocols or marketplaces such as Zionodes by liquidating their crypto assets for yield farming.
These marketplaces smartly increase the reward if the pool is empty to attract more farmers. Every protocol offers rewards with their unique strategies to reward their community for their contribution.
How Yield Farming works?
The first step of DeFi yield farming is to add funds to the liquidity pool. These liquidity pools are essentially smart contracts containing liquified crypto assets. A marketplace has several liquidity pools and leverages them to offer borrowing, exchange, and lending services.
These marketplace incentivized liquid farming by offering fees or native tokens to the liquidity providers. Liquidity farming is different from investing in the token itself as it involves utilizing your existing crypto assets to lend them to a non-custodial marketplace.
The reward tokens that the liquidity provider receives can also be used to earn more rewards. To increase the yield farming rewards, users shift their funds between different marketplaces. The rewards of yield farming also depend upon the initial investment, and to earn higher rewards; users have to liquidate more crypto assets.
How can you calculate Yield Farming returns?
The Defi yield farming returns are usually annualized, which helps you understand the returns you will receive over a year.
The general terms used to understand yield farming metrics are Annual Percentage Yield (APY) and Annual Percentage Rate (APR). The significant difference between APY and APR is that APY considers the effect of compounding while calculating the results.
However, it is vital to understand the APR and APY will only estimate your returns and not provide you an exact figure. As yield farming is a highly competitive and fluctuating market, you cannot predict even short-term returns accurately.
Why should you care about Yield Farming?
In 2020, several yield farmers made a fortune using the Ethereum network. The majority of marketplaces are built upon the Ethereum network, which is further built upon DeFi applications contributing to its enormous success.
As yield farming combines several resources in a single pool, crypto lenders and borrowers can benefit from this technology, and even yield providers can earn better returns. Yield farming is a competitive industry that helps loan lenders by reducing the interest rate to as low as 1% APR.
While yield farming has not reached a consensus in terms of its importance and usability, its popularity is expected to rise in the coming years.
Defi yield farming has proven to be able to provide excellent Yield if applied appropriately. While no one can predict the future of yield farming accurately, it is safe to assume it is bound to grow in the coming years.
While many platforms such as Zionodes have already established themselves in the yield farming industry, others are joining the race. If you are looking to try your hand and are looking for a robust platform to help you along the way, you can click here for more information.