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At its most basic level, yield farming is a system that allows cryptocurrency holders to lock up their holdings in exchange for rewards. It’s a method of earning fixed or variable interest by investing in a DeFi market with cryptocurrency. Yield farming is mostly done on blockchains in which rewards are received. While this may change in the future, the Ethereum ecosystem currently handles almost all yield farming transactions.

HOW YIELD FARMING WORKS

The first process in yield farming is to invest in a liquidity pool, which is a collection of smart contracts that receive funds. These pools provide the foundation for a marketplace where users can trade, borrow, or lend tokens. You’ve officially become a liquidity provider after you’ve added your funds to a pool.

You’ll be rewarded with fees generated by the underlying DeFi platform in exchange for locking up your finds in the pool. It’s important to note that yield farming does not include things like investing in ETH.

It’s far from simple, and it’s certainly not cheap. Those who provide liquidity are rewarded in proportion to the amount of liquidity they provide, so those who reap large rewards have correspondingly large sums of capital.

APY IN YIELD FARMING

The majority of protocols and platforms, as well as yield farmers, calculate expected returns in annual percentage yields (APY). The annual percentage yield (APY) is the rate of return on a particular investment over the course of a year. The APY takes into account compounding interest, which is calculated on a regular basis and applied to the amount.

A list of ten most popular yield farming protocols include; AAVE, Compound, Curve Finance, Uniswap, Instadapp, SushiSwap, PancakeSwap, Venus Protocol, Balancer & Yearn.finance.

QUICK RUNDOWN OF YIELD FARMING

• Liquidity suppliers deposit money in liquidity pools.
• Deposited funds are typically USD-linked stable coins such as DAI, USDT, USDC, and others.
• Another reason to contribute money to a pool is to accumulate a token that isn’t traded publicly or has a low volume by providing liquidity to a pool that rewards it.
• Your profits are determined by the amount you invest and the protocol’s rules.
• Reinvesting your reward tokens into other liquidity pools, which provide different reward tokens, allows you to create complex investment chains.

THE RISKS OF YIELD FARMING

Yield farming is a complicated process that exposes both borrowers and lenders to significant financial risk. When markets are volatile, users face an increased risk of temporary loss and price slippage. However, because of potential vulnerabilities in the protocols’ smart contracts, yield farming is vulnerable to hacking and fraud. Due to the intense competition among protocols, where time is of the essence and new contracts and features are frequently unaudited or even copied from predecessors or competitors, these coding bugs can occur.

References

[1]Hertig, A. (2020, December 17). What Is DeFi? Retrieved from https://www.coindesk.com/what-is-defi

[2] Deltec. (2021, February 12). What is DeFi and Yield Farming? Retrieved from https://www.deltecbank.com/2021/02/12/what-is-defi-and-yield-farming/

[3] Binance Academy. (2021, March 19). What Are Liquidity Pools in DeFi and How Do They Work? Retrieved from https://academy.binance.com/en/articles/what-are-liquidity-pools-in-defi

The Crypto Lending Space: A Beginner’s Guide

The digital lending sector is evolving at a great pace. Depending on your perspective and where your assets are now stored, crypto lending is the best thing since the creation of blockchain technology.

Cryptocurrencies are made possible by blockchain technology. Through the usage of Decentralized Finance (DeFi), a wave of  bank transfer transformations is currently ongoing and constantly evolving.

What Is Crypto Lending?

It is the act of lending cryptocurrencies or fiat money to borrowers in exchange for interest payments via crypto exchanges or other lending platforms, as the name suggests. As part of the rising trend in finance and blockchain, interest will be charged at a set rate for lending to take place.

Crypto lending is suitable for investors who have crypto assets but are unlikely to use them any soon. It enables investors to earn additional cryptos simply by lending them out, agreeing to the smart contract, and earning a rate of interest for a set length of time.

How Crypto Lending Works

Although crypto lending differs slightly from platform to platform, the core concept remains the same regardless of whatever platform you choose. An investor uses a lending platform to make his or her crypto assets accessible for loan at a fixed rate.

By submitting collateral that will be insured on the lending platform, a borrower will request to borrow or lend some of the lender’s assets from the exchange.

The entire process of cryptocurrency lending and borrowing is secure since smart contracts are used in crypto lending, and the contracts carry out the terms.

The following three agents are required for crypto lending to take place:

A Crypto Lending Platform

Lending and borrowing transactions are handled through this platform. There are platforms that are both decentralized and centralized.

• The Borrower

This might be individuals asking for money, and they’re usually utilizing crypto assets or fiat currency as collateral to get money for whatever reason.

• The Lender

This is an individual investor who lends or offers to lend his or her assets, such as a crypto asset owner hoping for a price or value increase. Some of the popular lending platforms include; Nexo,Vleppo & BockFi

Conclusion

Lending cryptocurrencies can be a simple way to earn passive income; however, the technology underlying crypto lending is still in its infancy and developing rapidly. Crypto financing will mature as more platforms contribute to the ecosystem.

References

[1] What is crypto lending (https://crowdfunding-platforms.com/crypto-lending)

[2] How crypto lending works (https://www.experian.com/blogs/ask-experian/what-is-crypto-lending/)

[3] Akash Takyar (https://www.leewayhertz.com/how-defi-lending-works/)