What is Yield Farming and How Can You Grow Your Crypto With this?

Date Published

12/07/2022

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“Yield Farming” could be a new term for you. If so, you are not alone. Numerous people do not know about Yield Farming because it’s not been so long since it was introduced to the world. It is a recently developed and emerging investment strategy that promises huge returns. Presently, it started booming across different parts of the world. 

The significant differences can be found in Yield Farming compared to conventional investment strategies. However, the concept of this emerging investment strategy is not new. It is somewhat similar to depositing your money in your savings account and getting a fixed percentage of interest in return. The only difference is that Yield Farming is riskier and can give massive returns as well unlike depositing your money in the bank.

In this post, you will learn “Yield Farming,” and how you can earn more crypto using the crypto assets you have. But before coming to this, you must know some terms that will be frequently used throughout this post. 

Some Important Terminologies to Know

  • De-Fi- De-Fi stands for Decentralized Finance. It is a fastly growing digital financial technology that eliminates the control of intermediaries on money, financial products, and financial services. 
  • Dapp- “Dapp” is short for Decentralized Applications. This term is used for those digital applications that are based on the blockchain method and run on a large network of computers instead of depending on a single computer. These apps are decentralized, so they do not come under the control of banks and legal authorities. Anyone can use these applications for lending, staking, or borrowing crypto. 
  • Smart Contracts- In the blockchain, Smart Contracts are computer programs or codes that finalize the financial agreement between buyer and seller automatically without the need for intermediaries. 

Yield Farming 

Yield Farming is a powerful way to multiply your crypto assets using decentralized applications (Dapps) or decentralized finance marketplaces. It primarily involves lending or staking your crypto or tokens to borrowers and receiving returns in form of interest, and sometimes, transaction fees. This seems very simple like lending money to a borrower, but it is a much more complicated procedure than that. 

How Can You Grow Your Crypto Using Your Crypto Through Yield Farming? 

When you deposit your money in your savings account, the bank locks your money. You are only allowed to do a limited number of transactions. In Yield Farming, the process happens the same way. The lender deposits its crypto in a liquidity pool through a decentralized application, which then is locked and lent to a borrower. The lender gets an interest amount or transaction fees on their lent crypto in return. In case, the lender wants to maximize its rewards, he/she can constantly shift their crypto on different De-Fi platforms. They receive the real payoff when a massive price rise comes in their coins.

Yield Farmers (lenders and borrowers) can earn rewards on their lent or borrowed crypto by receiving an interest amount or speculating on price swings. The entire procedure is executed on DEXs (decentralized exchanges), crypto wallets, or decentralized social media, such as Aave, Uniswap, Compound, and Curve Finance. 

Quick Facts to Know

  • Yield Farming is also known as “Liquidity Harvesting.”
  • The users involved in Yield Farming are called “Liquidity Providers” (LPs) because they provide liquidity to DEXs or Dapps. 
  • Most Dapps or DEXs are based on the Ethereum platform. 
  • Yield Farming could be riskier than conventional investment strategies.
  • You can receive unlimited rewards through Yield Farming.
  • Yield Farming cannot be controlled by governments and government organizations. 
  • Yield farming is highly volatile.
  • The borrower can also earn yield through Yield Farming by speculating on price swings.
  • The users can calculate their returns in APY (annual percentage yield) and APR (annual percentage rate)  

How Does Yield Farming Exactly Work? 

The working system of Yield Farming looks simple, but it is complex. It is based on a decentralized blockchain network of computers in which no external interruption from the banking sectors and legal authorities can be made. The entire system is inspired by blockchain technology that is widely used for crypto. 

The entire procedure of Yield Farming is done on decentralized applications. Using these applications, the users lend their coins or tokens to borrowers who purchase the coins for speculation. The agreement between the lender and borrower is facilitated by smart contracts unlike the conventional method of making a loan agreement. 

What are the Risks? 

There are two major risks of participating in Yield Farming: Loss of crypto due to a fall in price, Loss of crypto due to cyber attacks. 

As we have already mentioned above, Yield Farming is highly risky because the tendency of crypto is highly volatile. You may book massive profit in just a couple of hours if your coins get a massive price rise. But at the same time, you may book a huge loss in minutes if your coins’ price fall unexpectedly. 

Since Yield Farming is an unregulated investment strategy, it gives you the freedom to lend, stake, or borrow crypto without any interruption from the legal authorities, but it is very risky as well. The hackers can hack your account and steal your crypto. There is no guarantee if you could get your crypto recovered that is stolen by hackers. 

Calculating Returns

The returns from Yield Farming are calculated over a year. The two most used measurements include annual percentage yield (APY) and annual percentage rate (APR). 

APY is also used in traditional finance. It accounts for compounding which means reinvesting your profits for gaining more returns. APR does not account for compounding. 

Should You Participate in Yield Farming? 

As you have reached out to the last part of this post, you’ve got almost all the important information related to Yield Farming. Now you know that participating in Yield Farming has two sides. You can book a massive profit but you can book a massive loss as well, depending on your lending, staking, and borrowing strategies. So, the decision is yours. We do not want to influence your decision, but just want to add that Yield Farming has a bright future, and staying long in this field can certainly give you unexpected rewards.