In simple words, yield farming is related to making more crypto with your existence cryptocurrency. It yields rewards in exchange for the service you provide by lending the cryptos to other users through the Smart Contracts. Here, the crypto users offer liquidity to the ‘DeFi protocols’ and, in return, they receive a yield or the return. This Yield is in the form of a native token offering. The recent data from DeFi stated the total value to be around $9.5 billion, the total locked value.
Insight Into Yield Farming
This concept has erupted from the decentralized finance sector, where the general idea is to earn tokens while participating in the DeFi applications. Yield farming is also known as ‘liquidity mining’. The new projects on the decentralized finance platforms yield many rewards or tokens that make users use yield farming.
Yield Farming helps in locking and stacking the cryptocurrencies. You can find many liquidity providers on this platform who adds to the Liquidity Pool. Interestingly, the Liquidity Pool is like a ‘Smart contact’ that contains these funds. If you provide liquidity to the pool, you will receive a reward from the DeFi platform.
Under DeFi, the traders carry out yield farming using the ERC-20 tokens on the Ethereum. Most of the crypto trading and yield farming is carried out in the Ethereum ecosystem. In the future, users may witness other Blockchain platforms too.
Working of Yield Farming
Yield farming depends on the features and terms of the DeFi application. This practice formerly started as given a small fee or token to the users whenever they add liquidity to the pool. This practice became famous in 2020 when the Compound’s Comp token emerged as the DeFi largest token. Let us now see how it works:
- To generate maximum yield, the yield farmers or users employ complex strategies. Here, they carry out the staking of tokens in the chain of protocols.
- The liquidity pool acts as a marketplace where users can borrow, lend, or exchange the tokens. You need to pay a fee for using this pool as per the share of their liquidity contributing. The Yield Farming works similarly as the model of the AMM or Automated Market Maker works.
- DeFi applications may improve on the current use since the Blockchain platforms use new technology and approaches.
- The users do stacking and locking of the cryptos. But, if a yield farming user adds a new token to the liquidity pool, then they may earn more tokens. It is worth noting that users will get the share according to their contributed tokens or share only.
Yield farming helps the users by accumulating profit by adding tokens to the liquidity pool. Using the DeFi application, you can again add these tokens to other DeFi projects and earn a great amount of returns. Therefore, using yield farming on DeFi has aided in revamping the financial infrastructure in today’s time, and the incredible returns are attracting many crypto traders.