What is Yield Farming
A quick introduction for beginners
What is Yield farming?
Yield farming involves lending cryptocurrency in return for interest, usually in units of a new cryptocurrency. In simple terms, it’s a strategy where putting crypto temporarily at the disposal of some startup’s application earns its owner more cryptocurrency. It’s similar to how you’d earn interest on any money in your savings account. The real gains come if that coin appreciates rapidly. Gains are measured in terms of annual percentage yields (APY). Some examples of yield farming protocols are: Uniswap, Aave, Compound, Curve Finance
How does it work?
With yield farming, an investor’s deposit is essentially providing liquidity (liquidity provider) in the DeFi protocol (liquidity pool), and the earned interest is from trading fees that happen within the pool. These pools are the foundation of most DeFi marketplaces where users borrow, lend and swap tokens.
How risky is it?
With the huge profits, comes an incredible risk. Most of the stacking pools consist of new coins that could potentially lose their value, which will result in losses for the investors. Due to the early stage’s high APY, early investors usually hold a considerable share of the reward tokens, and taking profits using them will negatively impact their prices. The protocols and coins earned are subject to extreme volatility and rug pulls wherein developers abandon a project and make off with investors’ funds.
How to get started?
One example is using pancakeswap. You can buy $BNB on the Binance or CoinBase app, then send them to your Binance Chain Wallet where you exchange them for $CAKE. Then you can stake those tokens in a yield farm and generate passive income. At the time of writing this article, the APY is around 80%, which is great!
Conclusion
As crypto becomes more popular among investors, yield farming will become more mainstream. It’s a simple lending concept that has been around for as long as banks have existed but now it got digitalized using the power of crypto and blockchain.
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