You will hear about yield farming when using DEFI or Decentralized Finance platform. It is an activity where you put your crypto assets to work to earn the most possible returns from them. This method is perfect for crypto tokens holders who want to invest their money to earn a profit. Learn the explanation about yield farming below to achieve your goal.
About Yield Farming
As a crypto token holder, you can do anything with the tokens, including investing them to earn a profit. In the DEFI, a token holder can stake or lend crypto assets through yield farming. The profit you will get from this investment is cryptocurrency. Most token holders think that yield farming is one of the most potential investments.
It can be seen from the market cap that increases up to $10 billion from $500 million. The profit is coming from the incentive, such as a percentage of transaction fees, interest from lenders, or a governance token. It becomes an Annual Percentage Yield or APY.
The Way to Do Yield Farming
As a yield farmer, you should stake stable coins, such as USDT, DAI, or USDC. Then, you can start to search for tokens in the liquidity pools. Liquidity pools are crypto assets that facilitate trading on decentralized exchanges.
Liquidity mining occurs once yield farmers earn token rewards. You can use a variety of DEFI platforms to optimize the returns on your staked funds. The incentive from the platforms varies. The protocols calculate the returns in terms of Annual Percentage Yield or APY. It is the rate of return in a year on a specific investment.
The Way Yield Farming Works
You are about to work with a liquidity provider and a liquidity pool. A liquidity provider is an investor who deposits funds into a smart contract. The liquidity pool is a smartphone with cash. This method works based on the AMM model or Automated Market Maker.
The Automated Market Maker eliminates the conventional process on a cryptocurrency exchange. In this case, AAM creates liquidity pools based on the liquidity providers because they give deposit funds into liquidity pools.
The ready pools will be sent to the marketplaces. Then, people can borrow, lend, and swap tokens from the pools. Users should pay trading fees to the marketplace. On the other hand, the marketplace shares the fees with liquidity providers or LPs based on the share on the liquidity pools.
The Way to Calculate Yield Farming Returns
So, how to calculate yield farming returns? Calculating yield farming returns meaning calculating on an annualized model. You can calculate it using Annual Percentage Yield or APY and Annual Percentage Rate or APR. The difference between them is in the number of returns you get. APR may give you high returns since the system manages your profit.
The Benefits of Yield Farming
Crypto token holders choose to be yield farmers because yield farming offers higher profits compared to other traditional investments. You can even boost the returns to a specific method known as liquidity mining. You will get high interest in this activity when a company uses your funds to earn profits. It means that the company gains liquidity.
The company can also gain liquidity through trading or borrowing your capital from other clients. The more the company uses your capital, the higher the interest you earn from yield farming. Don’t get shocked if you see a lot of crypto tokens in your wallet when you earn high returns from this investment. Then, you can use the crypto tokens for any transactions and activities, including trading, saving, borrowing, transferring, or reinvestment.
The Risks of Yield Farming
You would better know the risks of yield farming before doing it. You can limit the risks and increase the profit by understanding everything.
The Use of Digital Codes
You are about to use digital codes of smart contracts to do yield farming. These codes are an agreement between parties. It is known as a cheaper and safer platform to conduct transactions. On the other hand, you should be aware of the vectors and bugs issues in the code.
You may suffer from loss risk, especially during sharp market moves. It happens because liquidity providers supply funds into pools to earn yields and trading fees from decentralized exchanges. This condition is dangerous for investors because AMM doesn’t update token prices, yet the market remains moving.
Tips to Get the Best Yield Farming Protocols
You need a trusted yield farming protocol to get a maximum return. The first thing you should do is check the history of the protocols. Ensure that the protocols are trusted enough. Then, check the percentage of the APR on the protocols.
A protocol that provides you with up to 15% of APR is a good option. Check also the APY or Annual Percentage Yield of the protocols. The APY of each protocol ranges from 0.21% to 3% and even more.
Some protocols even have up to 10% of APY. Don’t forget to learn how the protocols secure their systems. Let say there is a protocol that audits and reviews the process to ensure the highest level of security standard.
You can also learn from the total supply. The higher the total supply, the more reputable the protocols. A specific popular protocol can have a total supply of over $16 billion or even more. Ensure safe stable coin pools.
So, yield farming is a potential and promising investment for cryptocurrency holders. It leads you to a high return if you understand how to deal with this investment. That’s why you should learn the way to invest your crypto tokens in this investment.
Don’t forget to learn the benefits and risks to take a good action. Plus, find a trusted protocol that supports you to achieve goals. In the end, we can say that having crypto tokens in DEFI or Decentralized Finance platforms is profitable. You can’t only use them for regular transactions but also for making passive income by being a yield farmer.