Peopone In the vast crypto world, there are numerous ways to make money on your investment. Yield farming is one of the ways you can earn interest on your cryptocurrency. Many have called it the rocket fuel of decentralized finance. This strategy is potentially profitable, but it can also be quite complicated. What is yield farming and how can you make money from crypto yield farming? Read on to learn more.
What Is Yield Farming in Decentralized Finance (DeFi)?
Also known as liquidity mining, Yield farming is a strategy for earning rewards on your cryptocurrency holdings. It involves locking up your cryptocurrency for a given period to earn interest. If this sounds similar to staking, that’s because it is. In some respects, liquidity mining is comparable to staking. However, in this case, Yield farmers are adding funds to a liquidity pool with the hope of earning profit from it.
What started the boom?
People often link the launch of the COMP token to yield farming crypto boom. COMP is the native governance token of the Compound Finance ecosystem which went live in June 2020. To ensure equity and decentralization, Compound Finance made use of an algorithm to distribute the governance tokens based on liquidity.
This model of token distribution attracted investors to come to farm cryptocurrency by providing liquidity to the protocol. The success of this COMP model contributed to the concept of Yield farming as a way to raise liquidity for ecosystems and to make profits on crypto investment.
How does it work?
To farm crypto, investors contribute funds to a liquidity pool that powers a crypto marketplace. Users of this marketplace will be able to borrow or exchange or lend tokens for a fee. The liquidity providers will take a share of the fees based on their share of the entire liquidity pool.
How are returns calculated?
The expected returns on your yield farm token are typically calculated on an annual basis. Two of the most commonly used metrics for calculating returns are Annual Percentage Rate and Annual Percentage Yield. However, because yield farming is a competitive market, one cannot guarantee the accuracy of calculated yield farming returns.
The risks of yield farming
Although farming yield can be quite profitable, it s a complex cryptocurrency investment strategy. Only advanced users that know what they’re doing should farm yield this way.
Yield farmers also have to be wary of frauds and rug pull scams that will only take your coins on a project and abandon the project.
Then there is the risk of the smart contract itself. They’re prone to bugs and hacks that put you at risk of losing your investment.