What Is Yield Farming?

Yield farming is the process of staking or lending crypto assets to generate high returns using Decentralized Finance (DeFi).

Apr 11, 2022 - 16:45 Updated: Jun 8, 2022 - 15:32

Users borrow crypto on a Decentralized Finance Platform and earn cryptocurrency returns for their services.

Yield farming is the process of token holders maximizing rewards across different platforms.

Yield farmers provide liquidity to different token pairs and earn rewards in cryptocurrencies.

Yield farming is risky due to price volatility, rug pulls, and smart contract hacks.

How does yield farming work?

Yield farming allows investors to earn yield by staking coins in a decentralized application Yield farmers normally use decentralized exchanges (DEXs) to borrow or stake coins to earn rewards on price swings. With Yield farming, DeFi is facilitated by smart contracts that automate financial agreements between two or more parties.

Types of yield farming

Liquidity provider
Lending
Borrowing
Staking

Liquidity provider:

Liquidity provider users deposit two coins to a Decentralized exchange to provide trading liquidity, and exchanges charge a fee to swap two coins or tokens which is paid to liquidity providers.

Lending:

Coin or token holders can lend crypto to borrowers through a smart contract and earn yield from interest paid via loan.

Borrowing:

Farmers can use one token as collateral and receive a loan of other, Investors can farm yield with borrowed coins. If the farmer keeps their initial holding, it might increase in value over time. while earning yield on their borrowed coins.

Staking:

There are mainly two types of staking in the world in Decentralized finance. The main form is proof-of-stake blockchains, where a user is paid interest to pledge their tokens to the network to provide security. another form is stake LP tokens that are earned from supplying a DEX with liquidity. this phase allows investors to earn yield twice. as they paid for supplying liquidity in LP tokens which they can stake to earn more yield.

Popular yield farming protocols

Curve Finance
Uniswap
Aave
Pencakeswap

Curve Finance:

Curve Finance is the largest DeFi platform that lets users and other decentralized protocols exchange Stablecoins with minor fees and low slippage using its unique market-making algorithm and has approx $19 billion on the platform.

The curve has its token CRV that is used for governance for the Curve DAO. it provides a large list of stable coin pools with good APRs that are tied to fiat cash. Stablecoin pols are quite safe. they do not lose their peg value.

Uniswap:

Uniswap is a popular DEX that enables users to exchange tokens with no trust. Liquidity providers must stake both sides of the pool in a 50/50 ratio, and earn transaction fees as well UNI governance tokens. There are two versions of Uniswap V2 and V3.

Uniswap has become one of the most popular and trustless platforms for token swaps. This is useful for high-yield agricultural systems.

Aave:

Aave is a widely used Stablecoin yield farming platform is open-source decentralized lending and borrowing protocol with approx $14 billion in value locked up and a market worth $3.4 billion.

Aave has its native token, where investors can borrow assets and earn the compound interest form of the AAVE token.

Pencakeswap:

PancakeSwap runs on the Binance Smart Chain (BSC) network. PancakeSwap uses an automated market marker(AMM)model where users trade against a liquidity pool. It has the highest TVL among BSC protocols, It focuses on a token exchange, non-fungible tokens (NFTs), gambling games, etc.

PancakeSwap has its token called CAKE that can be used on the platform.

FAQs

Is yield farming profitable?

Yes, but it depends on how much money and effort you are spending to put into yield farming.

Is yield farming risky?

The number of risks that investors should know before starting, hacks, and losses due to volatility are not uncommon in the DeFi yield farming space.