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  • Adkins Fisker posted an update 6 months ago

    Decentralised finance (DeFi), an emerging financial technology that aims to get rid of intermediaries in financial transactions, has exposed multiple avenues of revenue for investors. Yield farming is certainly one such investment strategy in DeFi. It involves lending or staking your cryptocurrency coins or tokens to obtain rewards available as transaction fees or interest. This is somewhat comparable to earning interest from a bank account; you might be technically lending money on the bank. Only yield farming can be riskier, volatile, and sophisticated unlike putting cash in a bank.

    2021 has changed into a boom-year for DeFi. The DeFi market grows so fast, and even unpleasant all the new changes.

    How come DeFi stand out? Crypto market gives a great chance to make better money in many ways: decentralized exchanges, yield aggregators, credit services, and in many cases insurance – you’ll be able to deposit your tokens in every these projects and obtain a treat.

    However the hottest money-making trend has its own tricks. New DeFi projects are launching everyday, interest rates are changing all the time, many of the pools disappear – and a major headache to hold tabs on it but you should to.

    But note that committing to DeFi is risky: impermanent losses, project hackings, Oracle bugs as well as volatility of cryptocurrencies – these are the problems DeFi yield farmers face constantly.

    Holders of cryptocurrency use a choice between leaving their idle in a wallet or locking the funds inside a smart contract in order to give rise to liquidity. The liquidity thus provided is known to fuel token swaps on decentralised exchanges like Uniswap and Balancer, in order to facilitate borrowing and lending activity in platforms like Compound or Aave.

    Yield farming is basically the method of token holders finding methods for using their assets to earn returns. For a way the assets are widely-used, the returns will take variations. By way of example, by being liquidity providers in Uniswap, a ‘farmer’ can earn returns as a share in the trading fees each time some agent swaps tokens. Alternatively, depositing the tokens in Compound earns interest, since these tokens are lent in the market to a borrower who pays interest.

    Further potential

    But the prospect of earning rewards does not end there. Some platforms in addition provide additional tokens to incentivise desirable activities. These extra tokens are mined through the platform to reward users; consequently, this practice referred to as liquidity mining. So, for example, Compound may reward users who lend or borrow certain assets on their own platform with COMP tokens, what are Compound governance tokens. A lender, then, not just earns interest and also, furthermore, may earn COMP tokens. Similarly, a borrower’s interest rates might be offset by COMP receipts from liquidity mining. Sometimes, for example when the price of COMP tokens is rapidly rising, the returns from liquidity mining can over atone for the borrowing monthly interest which needs to be paid.

    This sort of prepared to take additional risk, there is certainly another feature that allows even more earning potential: leverage. Leverage occurs, essentially, when you borrow to invest; for example, you borrow funds from your bank to get stocks. While yield farming, an illustration of this how leverage is done is you borrow, say, DAI in a platform including Maker or Compound, then utilize the borrowed funds as collateral for more borrowings, and do it again. Liquidity mining could make video lucrative strategy in the event the tokens being distributed are rapidly rising in value. There is certainly, needless to say, the danger this does not occur or that volatility causes adverse price movements, which may cause leverage amplifying losses.

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