Cryptocurrency Yield Farming: What, Why, How and Risks

Pontem Network
Jul 10 · 5 min read

Cryptocurrency yield farming, also known as liquidity mining, is a process that can yield significant amounts of crypto. However, it’s not easy to do and there are risks involved. In this article, we’ll explore yield mining on Ethereum, Binance Chain, Polkadot and other blockchains. We’ll also discuss what yield mining is, how it works (and why), the profitability of yield harvesting and how to get started with yield farming!

TALK TO US: TWITTER | TELEGRAM | DISCORD

What is Yield farming?

The yield farming process is a relatively straightforward one. You buy up the coins you wish to yield farm, and all that’s left is waiting for them to “mature” in your wallet so they can be harvested with no risk of losing any of their accrued interest. At the inception of yield farming, many protocols were offering double digit % yield, but the underlying price of the tokens was very volatile so users are hedging their risk of the underlying asset price dropping with the yield they are generating. As more entrepreneurs launch new DeFi products and yield farming matures, the volatility and yield rates should eventually taper out.

What does yield mining entail? The main beauty about cryptocurrency yield mining is its simplicity: after buying up crypto assets like Compound or Curve — ones which accrue interest over time — it’s just a matter of holding onto them until they mature enough for yield harvesting. This is very similar to staking, however staking also serves the purpose of maintaining network security as it does on Polkadot, and Ethereum 2.0. However, yield mining is not without risks, as we’ll explore shortly.

How does Yield farming work?

How does yield farming work? It’s a relatively straightforward process which involves waiting for your coins to mature before harvest time so you can reap their benefits (and avoid risk). The main beauty about yield mining is its simplicity; all that’s really required is purchasing some coins and holding onto them until maturity while avoiding any major market dips or tough regulatory environments like those in China: this latter consideration might be difficult given the tumultuous nature of cryptocurrencies but it remains an important one nonetheless.

There are three types of yield farming on DeFi: Protocol usage, Network tokens, and leverage demand

Protocol usage: yield farming or yield mining involves the process of harvesting through a protocol. You need to purchase tokens from that particular protocol, wait for them to mature and then harvest your yield

Network token: yield farming is also possible with network tokens. The main difference? With this type of yield mining you’re not just limited to waiting until maturity; instead there are yield harvesting periods during which you can harvest yield otherwise known as rewards.

Leverage demand: the third type of yield farming is with leverage demand — it’s similar to protocol usage, except that instead of owning tokens from a particular network or having them in your wallet, you simply borrow capital for a short period of time and then pay back what you borrowed.

One common concern people have when approaching yield-farming is yield-mining’s “risk” factor.

What are the risks of Yield Farming?

What are the risks of yield mining? As alluded to earlier, yield-farming is not without its own set of downsides: namely, the risk that your yield will disappear if you don’t harvest it in time and there are also hacking concerns.

Loss of funds: If yield farming is successful, then the yield-farmed tokens will be sent to a wallet of your choice. However, if you don’t harvest that yield within a certain period of time (30 days) it could disappear!

The good news is that this risk can be mitigated by setting up an automatic harvesting script on Metamask or MyEtherWallet and only running transactions manually when there’s been enough yield mined in order to cover transaction fees.

This technique also helps prevent users from sending their funds out into cold storage wallets and forgetting about them… which leads us to our next point: hacking concerns.

Hacking: Yield-farming is a very tempting target for hackers because yield-farmers are moving funds from one account to another, which makes it easy to intercept yield-farmed funds.

Phishing yield-farmers is a common tactic, whereby yield-farmed funds are intercepted via fake websites (usually in the form of an email or Telegram. To avoid phishing, yield farmers should use different passwords for each yield farming account and always verify the website URL before logging in.

popular wallets like Metamask allow users to install a browser extension like Metasafe to help prevent phishing sites from hijacking their yield mined funds. MyEtherWallet’s latest update includes an anti-phishing filter.

Comparing yield farming tokens

Some of the most popular yield farming tokens are: SUSHI and Venus (XVS). On Polkadot, Yield farming is done by connecting to ETH and BNB yield farms via PolkadBridge

SUSHI: Sushi is a community-driven organization built to solve the liquidity problem in crypto by connecting many decentralized markets and instruments which include a decentralized exchange, a decentralized lending market, staking derivatives and yield instruments

Venus (XVS): Venus is a yield bearing Binance chain (BNB) crypto asset and market protocol. Like other market protocols, lenders and borrowers are not directly matched, instead lenders provide liquidity by depositing idle assets to earn interest, while borrowers access these assets by providing collateral.

Polkabridge (PBR): Polkabridge is decentralized exchange which allows users to swap tokens on polkadot directly with other blockchains through a yield-farming contract. A yield-farming contract is an agreement to receive a fixed amount of yield from the issuer as long as they maintain their ownership of yield-farmed tokens.

Yield mining with Polkadot requires that you first purchase tokens at market rate and then connect a wallet to one or more yield farms through Polkabridge. Other projects on Polkadot like PinkNode($Pnode) are enabling liquidity mining on Polka centric farm aggregator like UniFarm where you can stake PNODE and earn tokens from other Polkadot projects like Kylin($KYL), Polkafoundry($PKF), PolkaBridge($PBR), and Unifarm($UFARM). You can read more about it here.

Conclusion:

In conclusion, yield farming is a strategy to diversify your crypto portfolio and make passive income from the utility of crypto assets. Yield farming is not without its own set of risks: namely, the risk that your yield will disappear if you don’t harvest it in time and there are also hacking concerns. Nothing in life is ever free.

TALK TO US: TWITTER | TELEGRAM | DISCORD

DISCLAIMER** this article was written by GPT-3 openAI API. please let us know if you see any errors so we can improve our robot writers 🤖.

Pontem Network

Research, thought leadership & news on Facebook’s Diem, Polkadot and Crypto

Pontem Network

Pontem, the experimentation platform for Facebook’s Diem, is producing research, thought leadership and news on the ecosystems we support: Diem, Polkadot and general crypto.

Pontem Network

Written by

The Experimentation Platform for Facebook-Backed Diem

Pontem Network

Pontem, the experimentation platform for Facebook’s Diem, is producing research, thought leadership and news on the ecosystems we support: Diem, Polkadot and general crypto.