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Crypto Yield Farming – How It Works?

Mainly, the benefit of Crypto Yield Farming is the potential for profit. How does it work?

Crypto Yield Farming?

Chiefly, crypto yield farming is a process that allows cryptocurrency holders to lo

ck up their holdings, which in turn provides them with rewards put simply.

Further, when loans are made via banks using fiat money, the amount lent out is paid back with interest to explain further.

Essentially, with yield farming, the concept is the same: a cryptocurrency that would otherwise be sitting in an exchange or in a wallet is lent out via DeFi protocols.

Or locked into smart contracts, in Ethereum terms in order to get a return.

Basically, it involves lending cryptocurrency via, in most cases, the Ethereum network.

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Why is more important in Decentralized Finance?- Crypto yield farming

Firstly, Yield farming is more relevant in decentralized finance because of the high flexibility it offers over traditional finance.

Another aspect differentiating yield farming from conventional interest-making investments is the yield itself.

Additionally, to truly appreciate the simplicity of this concept, let us break it down. Yield is the interest. Yes, the same interest your bank would offer on top of your savings.

Actually, farming refers to the various ways deployed to maximize this yield (interest). So, yield farming is a set of techniques aimed at boosting your yield.

Further, you could earn a triple-digit yield here as well. But not all that glitters is gold. These massive returns carry the baggage of high risk and volatility to put it simply.

Apart from that, you are often exposed to scammers trying to dupe you off your funds.

Read More Crypto Market – How to Find Pullback?

How does Crypto Yield Farming work?

Firstly, yield farming involves adding funds to a liquidity pool, which are essentially smart contracts that contain funds.

Further, these pools power a marketplace where users can exchange, borrow, or lend tokens. Essentially, once you have added your funds to a pool, you have officially become a liquidity provider.

Additionally, for locking up your funds in the pool, you will be rewarded with fees generated from the underlying DeFi platform.

Essentially, please bear in mind that investing in ETH itself, for example, does not count as yield farming.

Instead, lending out ETH on a decentralized non-custodial money market protocol like Aave, then receiving a reward, is yield farming.

Secondly, reward tokens themselves can also be deposited in liquidity pools. Further, it’s a common practice for people to shift their funds between different protocols to chase higher yields.

Actually, it’s complex stuff. Basically, Yield farmers are often very experienced with the Ethereum network and its technicalities. Thereby, they will move their funds around to different DeFi platforms in order to get the best returns.

Essentially it is by no means easy, and certainly not easy money. Those providing liquidity are also rewarded based on the amount of liquidity provided.

So those reaping huge rewards have correspondingly huge amounts of capital behind them.

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What are the different types?

Liquidity Provision

Have you ever traded on a centralized exchange? Actually, all such exchanges work on an order book mechanism. To put it simply, all your buy/sell orders are listed on a centralized ledger. Further, if someone comes along to exchange their assets at a price quoted by you, the trade is executed.

Lending

Coin or token holders can lend crypto to borrowers through a smart contract and earn yield interest paid on the loan.

Borrowing

Farmers can use one token as collateral and receive a loan of another.

Steps

a. Liquidity providers deposit funds into a liquidity pool.

b. Deposited funds are normally, stablecoins linked to USD, such as DAI, USDT, USDC, and more.

c. Another incentive to add funds to a pool could be to accumulate a token that is not on the open market. Or maybe, it has low volume, by providing liquidity to a pool that rewards it.

d. Additionally, your returns are based on the amount you invest, and the rules that the protocol is based on.

e. Further, you can create complex chains of investments by reinventing your reward tokens into other liquidity pools. Which in turn provides different reward tokens.

Read More Crypto Indexing – How To Trade A Crypto Index? 2023

Benefits :

1. Mainly, the benefit of yield farming is the potential for profit. For instance, if you arrive early enough to adopt a new project, you could generate token rewards that might rapidly shoot up in value.

Further, you can sell the rewards at a profit, and you could treat yourself or choose to reinvest.

2. Currently, yield farming can provide more lucrative interest than a traditional bank, but there are of course risks involved too, simply put.

Additionally, interest rates can be volatile, making it hard to predict what your rewards could look like over the coming year.

Not to mention that DeFi is a riskier environment in which to place your money to put simply.

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Importance of Crypto Yield Farming in the World of Crypto

Basically, yield farming is important as it can help projects gain initial liquidity. Further, it is also useful for both lenders and borrowers. Essentially, it makes the world of taking out loans easier for all.

Additionally, those who are making huge returns often have a lot of capital behind them to put it simply.

But those wanting to take out a loan have access to cryptocurrency with low-interest rates. In fact, sometimes as low as 1% APR.

Further, borrowers are also able to lock up the funds in a high-interest account with ease.

Read More Crypto- Is Commodity Or Security?

Should You get involved in Yield Farming?

Firstly, getting involved in yield farming is tricky if you have no previous experience in the crypto world.

Secondly, projects like Compound and yearn. finance is working to make the world of borrowing and lending accessible to all.

Read more about Crypto Portfolio-How to Diversify?

What Strategies You can adopt to earn Money?

The most popular DeFi platform, Compound, rewards investors with COMP tokens for both supplying and capital borrowing. Further, many users maximize their returns by doing both.

Additionally, borrowing funds on Compound provides COMP Token as a form of cashback. Basically, the more you borrow the more COMP Tokens you get.

Secondly, if the cashback is worth more than the cost of the borrowing fees, you can keep on borrowing to farm the cashback rewards.

Further, because liquidity miners are compensated for both lending and borrowing, one strategy is to lend the highest interest rate asset. Thereby, borrowing as much as you can against the tokens, and then returning the remaining assets back to the lending pool.

The potential end result is 100% APY instead of the 0.01%-1.00% that most banks offer. Again, which is a very substantial increase.

Which Projects are Involved?

Firstly, there is a number of DerFi projects involved in yield farming. In terms of value locked into smart contracts is AAVE. Further, this project allows you to lend and borrow a number of cryptocurrencies.

Additionally, the next project is Yearn. finance, which works to move your funds between different lending and liquidity protocols (Compound, Aave, and dYdX) to get the best interest rates.

Secondly, there is Compound, an essentially DeFi platform that allows people to earn money on the crypto they save.

Read More UMA Crypto – Is UMA Crypto A Strong Investment? 2023

8 Best Crypto Yield Farming Platforms in 2023!

Firstly, there are 3 main ways of earning yield on your crypto holding. Secondly, in this list of best crypto yields farming platforms, I have highlighted DerFi platforms, and decentralized and centralized exchanges to cover these three types of crypto yield farming.

  • Provide liquidity on decentralized crypto exchanges
  • Use DeFi protocols to lend cryptocurrency.
  • Use yield-earning products on centralized crypto exchanges.

Without further ado, let’s get our list of the 8 best yield farming platforms available to crypto holders today.

Aave – The leading decentralized liquidity protocol.

Firstly, it is a decentralized liquidity protocol that implements a system of smart contracts that allow you to borrow crypto assets. Additionally, it allows you to earn interest on your holdings in a decentralized manner.

Essentially, Aave is a set of smart contracts deployed on a blockchain, but most users will interact with the protocol through an interface such as app. aave.com.

Currently, you can earn a yield on about 20 different crypto assets on Aave. Usually, the assets that pay the highest yield are stablecoins.

For instance, USDT, USDP, and TUSD. Secondly, the yields offered by the Aave protocol depend on market demand.

Specifically, if there is a lot of demand for borrowing a specific crypto asset, the APY offered to suppliers of that asset will grow.

In addition, this Aave offers a staking option for holders of the platform AAVE governance token.

Above all, this is a good way for AAVE holders to earn yield while contriArbitrum.

Yield Finance – A popular DeFi yield farming tool.

Firstly, finance is a DeFi protocol that rose to prominence in 2020. When the concept of yield farming started gaining a lot of attention to put it simply.

Additionally, the basic concept behind Yearn finance is that it gives you easy access to different DeFi protocols in order to help them maximize yield.

Secondly, with yield finance, you can deposit tokens into Vaults. These deposited tokens are then deployed into various DeFi protocols to put simply.

Further, for each vault that is available, you can see the list of strategies. It is used to earn yield, alongside a risk score for each strategy. Mainly, this is a welcome feature as it allows you to know exactly what their deposited tokens will be used for.

Further, Year. finance offers a broad range of vaults. You can earn a yield on assets like ETH, DAI, USDC, and many other popular crypto assets.

In addition, Yearn. finance provides a number of Vaults that are focused on providing liquidity to the Curve protocol.

Above all, it is a one-stop shop to earn yield using DeFi, Yearn. finance is certainly an option worth considering. Lastly, the protocol also has a governance token called YFI.

UniSwap – The leading decentralized exchange.

It is a decentralized exchange that pioneered the AMM (Automated Market Maker) model for swapping tokens trustlessly.

UniSwap works through liquidity pools, where you can deposit funds to provide liquidity for you if you want to swap between tokens.

For instance, the USDC /ETH liquidity pool allows you to swap between ETH and USDC.

Secondly, the incentive for providing liquidity to UniSwap liquidity pools is that the protocol charges a fee for token swaps. Additionally, this fee is then distributed to the poll’s liquidity providers according to the size of their share in the pool.

However, proving liquidity on AMMs like UniSwap is not risk-free. Further, there is the risk of impermanent loss, which essentially describes a situation where you had been better off simply holding tokens than depositing them into a liquidity pool.

Above all, you are more likely to get affected by impermanent loss, if you are providing liquidity for tokens that have a lot of price volatility.

Lastly, the UniSwap protocol is available on different blockchain platforms, including Ethereum, BNB Chain, Polygon, Optimism, Arbitrum, and Celo.

However, the liquidity that is available can vary significantly depending on which platform you are using UniSwap on.

Binance – A crypto exchange with a suite of products for earning yield.

Firstly, Binance is the world’s largest cryptocurrency exchange in terms of both user count and trading volume.

In addition to the standard suite of crypto trading services, Binance also offers a set of products under the Binance earn banner. Secondly, which makes it possible for crypto investors to earn a yield on their holdings.

Notably, one of the products SimpleEarn provides a convenient way to earn a yield on cryptocurrency. Further, the product supports a large number of different cryptos and provides both flexible and locked options.

Finally, when you are using flexible products, you deposit crypto and earn yield until you choose to withdraw your funds.

In contrast, locked products tend to offer higher yields than their flexible counterparts, but require you to keep your funds deposited for a specified period of time to earn rewards.

Further, you can still withdraw your crypto from a locked product prematurely, but you won’t earn rewards in this scenario.

Pancake Swap – The center of BNB Chain’s DeFi ecosystem

Firstly, PancakeSwap is a decentralized finance platform on the BNB Chain blockchain. Mainly, its core functionality is an AMM that functions very similarly to UniSwap. So, you can use PancakeSwap to earn rewards by providing liquidity.

Secondly, PancakeSwap also provides dedicated yield farms in these yield farms, you can stake the LP tokens you get when providing liquidity on PancakeSwap to earn additional tokens.

For instance, if you hold CAKE/BNB LP tokens, you can stake them to earn additional CAKE tokens. In addition, PancakeSwap also provides “Syrup Pools” where CAKE tokens can be staked in order to earn various tokens.

Secondly, these are usually tokens from projects in the BNB Chain ecosystem. Overall, PancakeSwap is a very useful platform to get familiar with if you are a fan of BNB Chain and the projects built on the platform.

There are more solid opportunities to earn yield by providing liquidity or staking CAKE to earn other types of tokens.

Harvest – A yield farming platform powered by DeFi.

Firstly, is a platform that’s designed to maximize yields for you by utilizing a variety of DeFi protocols.

Essentially, from this standpoint, Harvest can be seen as an alternative to Yearn finance.

Similarly, like Yern.finance Harvest also offers Vaults that you can deposit tokens into to earn yield. When staking Harvest pools together tokens from multi-users in order to optimize gas fees.

And further, utilizes auto-compounding mechanisms to improve yields. Additionally, this protocol features a token called FARM. Mainly, it gives its holders the performance fees collected by the protocol’s yield-generating strategies.

Oasis – A DeFi -a powered tool to earn yield or borrow crypto.

Firstly, Oasis is a tool that allows you to borrow crypto, earn interest, and access leverage

For instance, Oasis can be used to earn a yield on your ETH thanks to increased staking rewards.

You can deposit ETH into Oasis and get exposure to a larger amount of stETH with the help of the Aave protocol simply put.

Additionally, Oasis gives you the option to earn money from the DAI Savings Rate, which applies to holders of the DAI stablecoin.

However, this savings rate is relatively modest (about 1% APY at the time of writing). Additionally, this platform gives you additional yield options for DAI holders with the help of the UniSwap protocol.

Further, Oasis is a solid option for earning yield in DeFi, especially for fans of the DAI stablecoin and the associated Maker protocol.

Kraken- A popular exchange with crypto staking options.

Firstly, Kraken is a crypto exchange that has been on the market for about a decade. Further making it one of the longest-standing crypto exchanges. Kraken offers a crypto staking option that holders of certain cryptos can use to earn rewards.

Especially, while staking coins, isn’t typically what comes to mind when one thinks of “yield farming”, as it’s certainly a good option for people who hold crypto. Additionally, who would like to work for some extra profits?

Lastly, Kraken offers staking services for many Proof-of-Stake cryptos, including Ethereum, Cardano, Polkadot, Solana, Polygon, and many others.

Lastly, Kraken stakes coins on the user’s behalf and distributes the earned staked rewards back to the users (minus a fee).

The Risks of Crypto Yield Farming

Defi protocols – Smart Contract risk

Mainly, Decentralized finance protocols like lending protocols and yield farming protocols are susceptible to smart contract risk.

essentially, the smart contracts these protocols are comprised of can contain bugs that attackers can exploit to effectively steal funds from the protocol’s users.

Further, in some cases, even if the protocol’s smart contracts are functioning as expected, a DeFi protocol could be designed poorly from an economic perspective.

Especially, savvy users could identify flaws in a protocol’s economic design and exploit them to make a profit at the expense of other users.

Consequently, we have seen a large number of DeFi hacks since DeFi began rising in popularity in 2020. So it’s always a good idea to be careful when committing funds into DeFi protocols.

Decentralized Exchanges – Impermanent loss

Firstly, providing liquidity on the automated market maker (AMM) protocols such as UniSwap comes with the risk of impermanent loss. in fact, in some cases, simply holding tokens will deliver better results than depositing them into a liquidity pool.

Additionally, the risk of impermanent loss is lower if you are providing liquidity for assets that tend to stay in a limited price range.

Further, you can reduce the impact of impermanent loss by providing liquidity in pools where the two assets stay in a tight price range.

For example, a pool consisting of two dollar-pegged stablecoins (Let’s say USDT and USDC) will have a much smaller risk of impermanent loss for liquidity providers.

Centralized exchanges – Counterparty risk

Basically, when you deposit your crypto into yield-earning products offered by crypto exchanges, you have to trust that the exchange will manage your funds responsibly.

Actually, do not lose funds in risky investments or have them stolen. Especially, this is why some crypto enthusiasts advocate for keeping your crypto away from exchanges. You might have heard the saying “not your keys, not your coin”.

Chiefly, using centralized exchanges does have the benefit of convenience, as you don’t have to worry about managing your private keys or the quirks of on-chain transactions.

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Is Yield Farming Sustainable?

Doubtfully, some yield farming projects will not last and are simply not sustainable according to experts to put simply.

Further, these projects have often raised huge amounts in a short period of time and are then forgotten about. Additionally, some have even been described as scams. especially, the flash farming projects.

Secondly, yield farming “experiments” have involved experimental and unaudited code, which has led to unintended consequences.

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What is the difference between Yield Aggregator and Yield farming?

Firstly, the farming process typically expects participants to lock up or stake their funds. Basically, yield aggregators work by automating the farming process to produce the highest yields possible.

Is Staking the same as Yield farming?

Mainly, in yield farming, you provide liquidity to a platform and receive rewards in the form of tokens. Basically, from other crypto projects issued on the same platform.

Meanwhile, in staking, you can lock up your crypto assets into a blockchain to validate transactions and vote on protocol changes.

Read More Crypto Staking – How to Earn Passive Income? 2023

How much money can you make yield farming?

Chiefly, some yield farms offer up to 100% APYs. Overall, it is not hard to find farms that offer a yield to the tune of 30% to put it simply.

Secondly, since no other investment instruments offer this yield, it often draws the attention of a lot of people.

Further, you can find out the daily yields of key protocols.

Again, volatility risk is common to both yield farming and staking

Firstly, here’s a simplified example: If you deposit 100 DAI (CRYPTO: DAI) worth $100 with Compound, you’ll receive $100 worth of cDAI in return.

Let’s say the exchange rate was 1:1 when you made your deposit. If the interest rate for DAI is 10% and remains there for a year, the exchange rate of DAI to cDAI will be 1.1:1 after one year.

Further, when you go to remove your DAI from the protocol, you’ll receive 110 DAI back, worth $110.

Conclusion

By now, the yield farming crypto list has hopefully shown you that there is a plethora of opportunities out there for you if you want to earn a yield on your crypto holdings.

For now, yield farming remains a high-risk, high-reward practice that might be worth pursuing. As long as the necessary research and risk assessments have been carried out in advance.

If you are investing in crypto and want to earn a yield on your idle coins, you can choose between various DeFi lending protocols, decentralized exchanges, or centralized exchanges.

Of course, every opportunity to make a profit comes with its own risks, so make sure to carefully research any platform you are looking to deposit your funds.

Good luck on your crypto journey!

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FAQs

Is Crypto Yield farming profitable?

Crypto yield farming is less profitable nowadays as gas fees have increased significantly on blockchains like Ethereum. Gas fees are the transaction fees paid to miners to validate transactions on the blockchain.

How do you farm a Crypto yield?

An investor will stake a crypto coins through a ‘lending protocol’ via a dApp i.e.decentralized app on DeFi.

What is the risk of yield farming crypto?

A high-risk yield farming tactic is liquidity provision since users are exposing themselves to transient loss and the volatility of the cryptos that are deposited into the pool may change in value,which could cause liquidity providers to lose money.

Is Yield Farming good?

Yield farming can add layers of risk to an already volatile crypto investment. If things go well. However, yield farming can also increase your returns. Yield farming involves using “decentralized finance” to earn crypto income in the form of interest or rewards.

What is the best crypto farming?

Yearn
Binance – Offers high liquidity for yield farming
Huobi – Offers dual investment pools offering all or nothing
CropperFinance – Solana based yield farming platform.


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