Crypto World. YIELD FARMING. What is it?

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2 years ago

Happy day Community, I hope you are having a great time, so far I have brought you some articles on basic information about Blockchain, Bitcoin, Ether, among others, I hope you liked them, today we are going to talk about Yield Farming, I must clarify that I am not an expert, I am studying, as I find an interesting topic, I bring it for the knowledge of all.

If you want to generate passive income, then this topic will be to your liking.

Yield Farming or Liquidity Mining, is a strategy through which you try to obtain profitability by storing cryptocurrencies. In Yield Farming we have:

Liquidity Providers: in exchange for their funds they will have rewards.

Liquidity Reservers: they make smart contracts in charge of validating the accumulation of funds. To do these processes, we leverage Defi platforms (decentralized finance).

Most people who participate in Yield Farming make Stakins from stable cryptocurrencies, example: If you saw my previous articles, you will know that USDC and USDT are cryptocurrencies that are pegged to the US dollar, they are stable cryptocurrencies, however you can also bet with cryptocurrencies such as Bitcoin, among others.

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Pros and Cons of Yield Farming

ADVANTAGES

Can be used with different targets, there are several DeFi Yield Farming protocols with several years of proven performance and robustness, however, you have to do your own research.

It is only necessary to make a deposit with a certain amount of cryptocurrencies within the DeFi protocol, to obtain some profit, which will be proportional to the investment made depending on the time it remains on deposit.

It allows Farmers to obtain benefits with their harvests, occurring in periods between 6 months to 1 year. With reinvestment to generate higher profit levels working with compound interest.

DISADVANTAGES

It is a complex strategy recommended for people with advanced financial knowledge, it is better to study well before investing.

The practice of the strategy favors those who have large amounts of capital known as whales. A person with medium capital is able to receive capital but not as much as whales, but a person with low capital should pay close attention because his money can be spent only on commissions.

The security of smartcontracts, if the platform has not been properly audited there is a risk of theft of funds and partial or total loss of funds.

A big risk is smartcontracts, due to DeFi, many protocols are created and developed by small teams with limited budgets, this increases the risk of smart contract errors, a recent analysis showed that people who have the largest amounts of cryptocurrencies to use (whales) are the most likely to benefit from Yield Farming.

For example:

A Whale places 97 million dollars in a protocol and earns 800 thousand dollars in 3 weeks.

Another Whale places 40 million dollars and earns 500 thousand dollars in the same period of time.

This does not mean that people cannot have good results by investing less, however they should be aware that the big profit results are for people who have huge amounts of cryptocurrencies.

IMPERMANEN LOSS (Another risk to be aware of).

For example, this is when someone wants to add liquidity, let's say:

Someone owns 10 ETH, wishes to add liquidity to a pool with the ETH/USDT pair, in a 50/50 ratio.

He must deposit 10 ETH and 10,000 USDT, assuming 1 ETH = 1000 USDT.

If the pool you commit to has a total value of 100,000 USDT in assets it could be:

50 ETH and 50,000 USDT, your participation will be at 20,000 USDT/100,000 USDT x 100 = 20%.

IMPORTANT

Know the % of participation in a pool.

When the Liquidity Provider commits its asset through a smart contract, it will automatically issue LP Tokens, or Liquidity Pool Tokens, these tokens go directly to the liquidity provider when withdrawing its share of the pool at any time, which would be 20% of the above example, here comes into play the concept of Impermanent Loss, because liquidity providers are entitled to their share of the pool and not to a specific amount of Tokens, that is why they are exposed to another layer of risk if the price of their deposited assets varies significantly they could incur losses.

Other points of importance

APR (Annual Percentage Rate)

Reflects the real cost of a loan or other debt, for this reason the main interested in knowing it is the borrower, who wants to apply for a loan.

APY (Annual Percentage Yield)

Reflects the real yield of an investment, for this reason the main interested in knowing it is the investor.

APY, takes into account compound interest

APR, Does not take into account compound interest

Both APR and APY, can be used to value investments and loans, APR is more appropriate for analyzing loans and APY for analyzing investments, the difference is that APR also includes all other fees and expenses of the contract, while APY shows the impact of compound interest on your investment, hence the true value of return.

Compound interest is said to be the greatest force in the whole world, for example:

Suppose we put 1000 Cake in a pool with automatic compounding, that is, it is going to reinvest the profits, after a few weeks would have generated 2 more Cakes, these are added to the 1000, so we would have 1002 and on that is done again the calculation of the interest that we are going to earn. You will see how our capital would increase, therefore also the yield with that rate of return will be higher.

There are different platforms in different Blockchain to be able to apply Yield Farming, among the most known:

Uniswap, Sushiswuap, Pancake swap, Bakeryswap, Compound, Aave, Solfarm, Radium, Becoswap, Poliswap, it is going to depend on each one where they feel more comfortable in each network, but it is always better to study the pros and cons of each platform.

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The information obtained from the Web is indicated

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REFERENCES:

Photo Portada https://educacionfinancieraycriptomonedas.com/que-es-el-yield-farming-y-su-impacto-en-el-ecosistema-defi-los-prestamos-colateralizados

https://primexbt.com/for-traders/yield-farming-crypto/

https://es.cointelegraph.com/explained/what-is-yield-farming-and-its-impact-on-the-defi-ecosystem

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2 years ago

Comments

That is well explained, I do like yield farming 😁

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2 years ago

Glad you liked it, thanks for visiting.

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2 years ago

I did and you are very welcome

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