Yield farming is the hottest topic in decentralized finance (DeFi).

What is yield farming? How did it start? What are examples of yield farming? What are thr risk of yield farming?

All this question will be answerex in this article. Bu before you start reading, you should know first what is DeFi? You can check my prevuous article to knew more about DeFi.

https://read.cash/@RC.brielle/defi-future-of-finance-4aa44d25

What is yield framing?

Yield farming maximise the rate of returned capital by leveraging different DeFi protocols.

Yield farmers chases the highest yields by switching multiple DeFi strategy. This profitable strategies involves different protocols sych as Compound, Uniswap, Synthetix and Balancer.

If this strategies doesn't work anymore or there is more better strategy that is available, yield farmers moves their funds around. They may change protocols or swap thier coin to another one which is generating more yield. This is called crop rotation.

This strategy can be compared to bank searching where you invest your money with the highest annual percentage yield.

In yield farming ther is a higher chance of capital return up to 100% than on bank which offers less than 3% annual return.

There are 3 elements that makes such return on yield farming.

1. Liquidity mining

   • a process of distributing tokens to the users of the protocol. One of the first DeFi projects that introduced this is Synthetix. Synthetix started rewarding users by adding liquidity mining in their SETH/ETH pool on uniswap with SNX token.

   • Adds incentives for yield farmes with token rewards on top of the yield that is generated by the protocol. Some protocols are giving so much incentives which some farmers are willing to lose their capital just to get the token rewards whick makes the strategy higly profitable. Liquidity mining of Comp tokens introduced by Compound.

2. Leverage

   • a strategy using borrowed money to increase the potential return of investment.

   • Farmers can deposit their coins to serve as collateral to one of the lending protocols and borrow other coins. They can use this borrowed coins to serve as further collateral and borrow even more coins and so on. By this strategy, farmers can increase their profits.

3. Risk

   • Liquidatuin Risk: Overcollaterized token or loans are susceptible by liquidation

   • Smart contract risk: Contains bug, platform changes, adminkeys and systemic risk

   • DeFi specific Risk: attacks on liquidity pools

Yield farming is a high risk - high reward game!

Yield farming strategies

Yield farming strategies are set of steps that aims in gaining higher return of investments. This steps includes:

1. Lending and Borrowing

   • Simple way of getting apy (annual percentage yield) in your capital

   • Farmers supplies stablecoin in the lending protocol and start to receives returns in their capital

2. Supplying Capital to the Liquidity Pools

   • Farmers supply one of the liquidity pools and rewarded by fees that are paid by swapping coins to another

3. Staking LP tokens

   • Some protocols incentivise users by allowing them to stake their Liquid provider tokens that represents their participation on a liquidity pool.

Yield farming strategies can become ineffective quickly by protocol or incentive changes.

Always keep monitor of strategies or always rotate crops if necessary.

Yield farming is new thing and far from being a fully efficient market. There are plenty of opportunities that may bring a better return in our capital than on traditional finance or even centralized crypto finance. But also take note that Yield farming also comes with risks.

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