If you’re a fan of all things DeFi, you’ve probably heard mention of yield farming before. But how much do you really know about it?
Yield farming is often considered pretty complicated, so we thought we’d break it down for you.
Yield farming is the process of locking tokens and receiving rewards in return, aka earning interest by investing your crypto in DeFi markets.
The process involves a liquidity providers (you) depositing funds into a liquidity pool, which is essentially a smart contract that locks your tokens away. This pool powers a marketplace on which users can borrow, lend or exchange tokens. Anyone who uses the marketplace must pay a fee, which then goes to you - the liquidity provider. So, you’re basically lending your crypto to others and earning interest in return.
Here’s where things get a little more complicated: you can also create a chain of investments by reinvesting your reward tokens into other liquidity pools for – you guessed it – yet more rewards. Experienced yield farmers commonly move their funds between multiple different DeFi protocols in order to get the best returns.
There are a number of yield farming platforms and protocols out there. Some you might be familiar with are Aave, which lets you easily lend and borrow a range of crypto, and yearn.finance, which moves your funds between different liquidity pools to find the best interest rates.
The main draw of yield farming is, unsurprisingly, profit. It can generate some serious interest compared to traditional investments or even other forms of DeFi staking, which can then be reinvested in other DeFi projects for even more yield.
However, in order to make any significant profit you need to invest a significant amount of money, which makes yield farming somewhat inaccessible to your average crypto enthusiast. Volatile interest rates also mean you never really know what your returns will look like.
Unless you’re particularly crypto savvy, the process of yield farming may not seem all that straightforward. Experienced yield farmers tend to employ extremely complex strategies to maximise their gains - and they don’t like giving away their secrets.
So, is yield farming something you would participate in? Or will you be sticking to easier ways of earning interest on your crypto, like X-Accounts?