Yield Farming | Fuelling the Decentralized Finance Space

What is Yield Farming, and how it works?

Yield farming is a new concept in the world of cryptocurrency exchange development and smart contract solutions that involves staking or lending crypto assets in order to generate large returns or incentives in the form of additional cryptocurrency. This groundbreaking but dangerous and unpredictable use of decentralized finance (DeFi) has recently exploded in popularity thanks to new technologies like liquidity mining.

Liquidity providers (LPs) are encouraged to stake or lock up their crypto assets in a smart contract solution-based liquidity pool using yield farming methods. Rewards could include a percentage of transaction expenses, interest from lenders, or a governance token. On an annual basis, these returns are calculated as a percentage yield (APY). As more investors contribute funds to the related liquidity pool, the value of the released returns increases.

Initially, most yield farmers staked well-known stablecoins like USDT, DAI, and USDC. On the other side, the most popular DeFi protocols currently run on the Ethereum network and provide governance tokens for liquidity mining.

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What Caused High-Yield Farming to Take Off?

The launch of the COMP token, which serves as the governance token for the Compound Finance ecosystem, has generated a rise in interest in yield farming. Holders of governance tokens are granted governance privileges. However, how will these tokens be distributed while maintaining the network’s decentralization?

A common strategy to establish a decentralized blockchain is to distribute these governance tokens algorithmically with liquidity benefits. By giving liquidity to the system, liquidity providers are motivated to “farm” the new token.

Despite the fact that the COMP did not originate yield farming, it did popularise this type of token distribution strategy. Other DeFi companies have come up with innovative strategies to bring liquidity into their ecosystems.

What are the Pros and Cons of Yield Farming?

One of the most important benefits of yield farming is profit. Farmers with high yields who are among the first to deploy a new project may be rewarded with tokens that are appreciated fastly. If they sell tokens at the correct time, they could make a lot of money. Profits can be re-invested in additional DeFi initiatives to boost yield even further.

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To generate any significant profits, yield farmers must often invest a big amount of money upfront — even hundreds of thousands of dollars may be on the line. Due to the very volatile nature of cryptocurrencies, particularly DeFi tokens, yield farmers face a large liquidation risk if the price decreases unexpectedly, as it did with HotdogSwap.

Furthermore, the most effective yield farming techniques are difficult to master. As a result, folks who don’t fully understand all of the underlying protocols are more vulnerable.

The project teams and the smart contract code that powers them have attracted the attention of yield farmers. Because of the potential for profit, many developers and entrepreneurs are joining the DeFi industry. They build projects from the ground up or even duplicate their predecessors’ code. Even if the project team is reliable, the code is frequently untested. It’s more prone to bugs and vulnerable to hackers as a result.

Key Challenges and Opportunities with Yield Farming

The bulk of DeFi applications use the Ethereum blockchain, which presents some significant issues for yield farmers. Prior to the 2.0 update, the Ethereum network was suffering scale challenges. The Ethereum network becomes crowded as yield farming grows more popular, resulting in slow confirmation times and higher transaction fees.

Some have argued that DeFi may wind up self-cannibalizing as a result of this scenario. On the other side, Ethereum’s issues appear to be more likely to assist alternative networks in the long run. For example, the Binance Smart Chain has emerged as a viable option for produce farmers who have flocked to the network to take advantage of new DeFi DApps like BurgerSwap.

Furthermore, Ethereum’s current DeFi operators are seeking to tackle the problem using their network’s second-layer solutions. As a result, yield farming will continue to exist for a long time to come, assuming Ethereum’s issues do not prove fatal to DeFi.

Also, Read | https://brugusoftwaresolutions.medium.com/earn-a-passive-income-with-yield-farming-in-2021-61cdfdafa896

Top Most 5 DeFi Yield Farming Protocol

Yield farmers will commonly employ a number of DeFi platforms to maximize the returns on their staked assets. These platforms offer a variety of incentives for lending as well as liquidity pool borrowing. Seven of the most popular yield farming techniques are listed here.

Compound

It’s a money market where users can earn algorithmically adjusted compound interest as well as the COMP governance token by lending and borrowing funds.

MakerDAO

It’s a forerunner in decentralized credit, allowing users to borrow DAI, a USD-pegged stablecoin, by securing crypto as collateral. In place of interest, a “stability tax” is imposed.

Aave

It’s a decentralized lending and borrowing protocol that lets users use the AAVE (formerly LEND) token to borrow assets and earn compound interest for lending. Aave is well-known for encouraging credit delegation and rapid loans. With this technique, borrowers can acquire loans without putting up any security.

Uniswap

It is a well-known decentralized exchange (DEX) and automated market maker (AMM) that allows users to trade practically any ERC20 token pair without involving a third party. To earn a share fee and the UNI governance token, liquidity providers must bet 50/50 on both sides of the liquidity pool.

Yearn. Finance

It’s a protocol for decentralized aggregation automation. It allows yield producers to employ several loan protocols, such as Aave and Compound, to achieve the best yield. Rebasing is used by Yearn. Finance to maximize the value of the most efficient produce farming services.

Contact our blockchain and cryptocurrency development professionals for more details about Yield Farming. They are knowledgeable and experienced in the field of decentralized finance.