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What Is Yield Farming in Cryptocurrencies?

What Is Yield Farming in Cryptocurrencies?

As of the moment, cryptocurrencies are one of the things that many people find attractive. Thus, it's not a surprise to find yourself learning about it. If you're new to cryptocurrencies, you may have come across the term yield farming and wondered what it's about. Thus, you may ask:

What is yield farming in cryptocurrencies? Yield farming, also known as liquidity mining, is a method to generate rewards with cryptocurrency assets. In a way, it means locking up cryptocurrencies and get rewards for them. Such rewards can be deposited to other liquidity pools to earn rewards there.

Understanding this method is crucial if you plan on using cryptocurrency to earn. In this article, we'll cover everything you need to know about Yield farming to understand the process better.

Without further ado, let's get into it!

What is yield farming?

In a nutshell, Yield farming is the process of staking or lending cryptocurrency assets. The purpose is to generate high returns or rewards.

Such rewards can be in the form of additional cryptocurrency. In short, yield farming protocols incentivize liquidity providers. These providers stake or lock up their crypto assets in a smart contract-based liquidity pool.

In general, it refers to any effort to put crypto-assets to work. Further, they generate the most returns possible on those assets.

Further, a yield farmer might move assets around within the compound. It always chases whichever pool offers the best APY from week to week.

With this in mind, you may wonder if this method is a profitable one.

Is yield farming profitable?

Some users think of yield farming as another money-making bubble. However, in reality, it continues to be a profitable method for many people.

In general, yield farming is crucial for many reasons. For instance, it can help projects gain initial liquidity. Moreover, yield farming is also useful for both lenders and borrowers.

In short, it makes the world of taking out loans easier for all. Thus, those who make huge returns usually have a lot of capital behind them.

One thing to note is that yield farming is a complicated matter. Thus, yield farmers are usually the ones with experience. Further, these people know how to move their funds around different platforms to get the best returns.

In short, it's not an easy task, and also not easy money. Further, the rewards also depend on the capital. Thus, those who put vast amounts as capital will also enjoy huge benefits.

How do I become a yield farmer?

A yield farmer is someone who stakes, lends, or locks up cryptocurrency to earn rewards.

The first step to becoming a yield farmer involves putting funds into a liquidity pool. It can be smart contracts that contain funds.

The said liquidity pools power in a particular marketplace. It's an area where users can exchange, lend, or borrow tokens. Thus, once you added funds to the pool, you become a liquidity provider.

In return, you get rewarded with fees generated from the underlying DeFi platform. Of course, remember that some things don't count as yield farming. One good example would be investing in crypto itself.

Instead, yield farming happens when you lend out crypto on a decentralized non-custodial money market protocol. As you receive a reward for it, that's Yield Farming.

The rewards come as tokens, and you can continue depositing them in other pools. It's a common practice for those who shift their funds between various protocols, chasing higher yields.

How do you earn a Bitcoin yield?

If you want to earn a Bitcoin yield, you can do so in three ways. You can take a look at each way and see which one fits your preference.

DeFi Loans & Lending

The first way to earn a Bitcoin yield is through DeFi Loans and Lending. It's a common thing in the cryptocurrency space, and it works by lending to individuals through a DeFi crypto lending platform.

The process is quite similar to traditional banking. Crypto holders who look for a better yield deposit their assets on a platform. When someone borrows these assets, they earn interest.

In general, those who take out a loan put at least 150% of the loan value in cryptocurrency as collateral. In exchange, the borrower receives fiat.

This way, it allows borrowers to get a credit line on their crypto without liquidating their holdings.

As a return for lending fiat, the lender charges an annual percentage fee. As the borrower repaid the loan with interest, he'll receive his crypto asset back.

Crypto Margin Lending

Another method to improve the yield from Bitcoin emerged as a result of cryptocurrency exchanges. It offers leveraged trading to its clients.

As a trader uses leverage, he essentially uses his assets to take out a loan. It enables him to leverage trade with more money than they have.

Of course, all the normal trading risks also come with leveraged trading.

Crypto Staking

The last method would be crypto staking. In this method, investors stake specific cryptocurrencies to generate a return.

In a nutshell, it's the act of locking up a cryptocurrency to earn a reward. This method usually gets paid with the same cryptocurrency.

This process involves holding funds in a cryptocurrency wallet. Its purpose is to support the security and operations of a blockchain network.

In general, the percentage that an investor earns depends on the staked cryptocurrency. Thus, the returns in fiat terms can be quite variable.

Summary

In a nutshell, yield farming is a method to lock up funds to get rewards in the process. It involves lending out cryptos in different ways to earn fixed or variable interest.

The method can be a little bit complex, making it difficult for beginners to handle. Thus, the yield farmers are usually the ones with experience. Nevertheless, the rewards are far greater than traditional investments.

Of course, like other forms of investments, the vast rewards also mean it entails enormous risks. Thus, it would be best to have in-depth research before pursuing it.


Published: 03/18/2021
What Is Yield Farming in Cryptocurrencies?
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