The world of finance is changing rapidly, and the rise of DeFi (decentralized finance) has brought about a new way for crypto holders to earn passive income. Yield farming is a process of participating in exciting service offerings using smart contracts to earn a percentage of fees in the form of crypto.
What is Yield Farming?
Yield farming is a decentralized process of putting digital assets to work at optimized platforms, often to earn passive income in free digital assets. It is a way for crypto holders to earn more crypto through exciting implementations run on smart contracts. It involves participating in services such as lending funds to others without the involvement of third parties. Yield farmers calculate their returns by the annual percentage yield (APY) to consider compounding.
However, yield farming isn't without risks. There is a risk of price volatility, rug pulls, and smart contract bugs or hacks that make funds vulnerable to attackers. It is, therefore, vital to perform extensive due diligence before getting involved in the DeFi world.
Ways to Earn with Yield Farming
Staking is a popular way to earn with yield farming. There are two modes of staking in the DeFi world: proof-of-stake (PoS) and staking liquidity pool tokens. In PoS, users get paid interest to stake their cryptocurrency to the network to make it more secure. In the second mode, users can stake to earn more yield by providing liquidity in the LP tokens.
Liquidity providers deposit two different types of coins to a DEX to provide liquidity for trading. Then, depending on the network, these exchanges charge a small fee to swap those coins or tokens, which will then be paid to liquidity providers.
Yield farmers can use one coin or token as collateral and receive a loan with another. In doing so, they keep their initial holding, which could appreciate over time, while also earning interest on their borrowed coins or tokens.
Holders of a coin or token can lend their coin or token to borrowers using smart contracts and earn a yield from interest paid on the loan.
Top Yield Farming Protocols
Uniswap is one of the top-yield farming protocols and is a decentralized exchange built on the Ethereum network. It enables users to leverage its liquidity pools to earn greater interest on their crypto holdings and to swap between thousands of ERC-20 tokens.
PancakeSwap, launched in 2020 and built on the Binance Smart Chain (BSC), is one of the top-yield farming protocols today. It enables users to farm by providing liquidity and, in return, get Liquidity Pool tokens convertible into CAKE, the platform's native token, or other cryptocurrencies.
Curve Finance is another top-yield farming protocol according to TVL (total value locked). It was designed to ensure efficient crypto trading and offer high annual interest returns.
Aave is an Ethereum-based decentralized platform and a popular open-source liquidity protocol that enables users to lend and borrow cryptocurrency. It is one of the tops and most used yield farming platforms, and its native token, AAVE, offers users various benefits such as fee discounts, voting power for governance, and more.
Yield farming is a way for crypto holders to earn passive income by participating in various DeFi services such as lending, borrowing, staking, and liquidity provision. Yield farmers move their assets between platforms to maximize returns, which are calculated using the annual percentage yield (APY) and expressed as crypto.
Although yield farming has the potential for exponential growth, it also comes with risks such as price volatility, rug pulls, and the possibility of smart contract bugs and hacks. Yield farmers can earn by staking, providing liquidity, borrowing, or digital lending assets, and popular yield farming protocols include Uniswap, PancakeSwap, Curve Finance, and Aave. Therefore, it's essential to do thorough due diligence before participating in the DeFi world.