Yield Farming: How to Start Generating Passive Income With Crypto
Inflation all over the world is at an all-time high. Governments, in particular, have been printing money at an uncontrollable pace with almost a fifth of all U.S dollars in existence being printed in 2020 alone.
In contracts, Bitcoin’s limited supply (unlike fiat money which can be printed continuously and therefore devalued over time) makes it particularly attractive as an investment asset.
What’s more, cryptocurrencies such as bitcoin not only allow you to hedge against the deflationary nature of fiat money but also multiplying returns on your saved capital ten-fold.
Introducing Yield Farming: a process of increasing your crypto capital holdings by simply staking or lending.
What is yield farming?
Yield farming, also known as staking, crypto lending, or liquidity mining, is an increasingly popular and new crypto investment that provides a passive income opportunity for anyone. Yield farming lets you lend your crypto holdings by locking them in a DeFi (decentralized finance) platform’s smart contracts to generate higher returns.
As a lender of crypto capital, you are providing liquidity to the DeFi platform and therefore you are entitled to daily rewards yielded by the liquidity you provide. In other cases, you can stake your cryptocurrency in support of a proof-of-stake blockchain’s security and earn an APY on your staked coins.
How does yield farming work?
Yield farming is very similar to traditional methods of saving money in a bank; however, most yield farming protocols offer much higher APYs than any bank could, and there is no intermediary involved.
Some vaults may even offer several-figure APYs for a certain amount of time, depending on current fees and Total Value Locked (TVL).
If you are yield farming through providing liquidity to a DeFi protocol, the first step is to provide liquidity in a pool of a pair of tokens on a decentralized exchange (DEX). In this case, you will need two sets of cryptocurrencies. Submitting your crypto capital to a DEX’s liquidity pool entitles you to an LP (liquidity provider) token proportional to your share of the entire liquidity pool.
You can go ahead and stake this LP token in a vault to get staking rewards. Therefore, while you will earn from the fees generated from the DEX in terms of transactional trading fees, you will also earn the reward for staking your LP tokens.
There are also yield farming options that allow you to lock a single token in a smart contract to earn staking rewards without going through an LP token.
Risks of yield farming
Like every other investment venture, yield farming comes with a set of risks. To begin with, interacting with multiple smart contracts as you search for higher yields can leave you vulnerable to DeFi platforms that have faulty smart contracts. This makes a case as to why it is important to conduct due diligence. A faulty smart contract can lead to catastrophic financial losses.
There is also the dreaded risk of impermanent loss while providing liquidity. Most DeFi platforms are built with an automated market-making protocol; however, when one of the assets in the liquidity pool changes its price too far from the other asset in the pair, impermanent loss occurs. This can put a dent in your initial capital, especially if you decide to close the contract while experiencing impermanent loss.
Conclusion
Instead of leaving your crypto assets to waste away in your wallet, yield farming provides an innovative way to generate passive income. With the availability of a variety of yield farming protocols, you can take advantage of the various incentives to provide liquidity or simply stake a token as you grow your crypto portfolio.
For more information and yield farming’s best practices, be sure to visit Verso’s Telegram and whitepaper to learn more.
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