DeFi Yield Farming a Beginner’s Guide
Key Concepts:
- Yield farming provides users a way to put their idle assets to work and earn rewards in the process.
- It involves users providing digital assets to DeFi protocols in order to earn fixed or variable interest returns.
- There are a number of DeFi protocol types that offer Yield Farming; Lending, Liquidity Pools, Derivatives.
- The rewards can be more lucrative than traditional investments, but there is also risk involved.
At its core, Yield Farming is a process that allows digital asset holders to temporarily lock up their holdings and earn rewards. More specifically, it lets users earn either fixed or variable interest by investing their digital assets in a DeFi protocol. AscendEX offers a variety of Yield Farming products, including lending protocols, derivatives protocols and liquidity pooling.
What is Yield Farming?
Yield Farming is a strategy used by defi protocols to promote healthier liquidity conditions and community creation/interaction. In practice, Yield Farming is similar to the concept of Staking for rewards in that users in both cases are using their digital assets to generate passive income. However, Field Farming is different in that rather than contributing to a proof of stake network, it involves lending the locked-up digital assets to DeFi protocols. The result is that these protocols use smart contracts to leverage the tokens for different purposes. Similar to the way that P2P lending works, DeFi lending protocols allow lenders to earn interest on their crypto assets while giving borrowers access to more capital for trading. Liquidity Pool farming protocols, also known as automated market makers, use the locked assets to provide token liquidity for the asset being farmed.
Benefits of Yield Farming
Digital assets that would otherwise be sitting idle on an exchange or in a wallet are instead distributed to DeFi protocols in order to earn yield over time. Just as a bank takes a deposit from a customer and pays him 1% interest and then loans that same amount out to another customer and charges 5% in interest, a decentralized protocol will utilize the same strategy but with a smart contract as the intermediary which reduces the cost and increases efficiency. Liquidity providers can be paid yield in the form of governance tokens or paid in kind.
Yield Farming is often carried out using ERC-20 tokens on Ethereum, with the rewards being paid out in the form of ERC-20 tokens. While this might change in the future, most current DeFi yield farming transactions occur in the Ethereum ecosystem.
Benefits of Yield Farming on AscendEX
- Seamless User Experience with ‘One-click’ Farming Functionality
- No Gas Fees
- Ability to Maximize Yield with Lucrative Farming Strategies and Leverage
Yield Farming as an individual can be complicated and requires extensive interactions with smart contracts and knowledge of blockchain infrastructure to take advantage of lucrative yield farming opportunities. At AscendEX, our team handles all backend integration with DeFi protocols, thus allowing users to farm yield via a simple UX with a “one-click” function. Additionally, every action involved in Yield Farming as an individual (“approve,” “deposit,” “reward claim”) requires gas fees paid on the relevant DeFi network. These fees reduce the profit margin and therefore negatively impact yields generated by an individual Yield Farmer. By farming with AscendEX, users enjoy the benefit of paying no gas fees, thus maximizing their yield.
One of the key features of yield farming is a farmer’s ability to rotate between different protocols to maximize yields. AscendEX will soon offer subscriptions to pure “yield-driven” strategies for users who focus on maximizing their yield on principal capital rather than accumulating DeFi governance tokens. Users can further enhance yield by engaging in leveraged strategies to increase farming exposure.
