Yield Farming

What is Yield Farming?

Yield farming is a method to earn more cryptocurrency with your cryptocurrency!

It may appear to be straightforward, but there’s a lot more going on behind the scenes. This guide will help you understand what yield farming is, how it works, and review the benefits and risks.

Basically, crypto holders can lock up their holdings in return for rewards in the form of additional cryptocurrency. To be more specific, this process allows investors to earn fixed or variable interest by investing cryptocurrency in the decentralized finance (DeFi) market. It’s a very lucrative financial strategy but a complex one!

So yield farming is the practice of liquidity mining, staking or lending crypto assets in order to generate high returns or rewards in the form of additional cryptocurrency. Incentives can be a percentage of transaction fees, interest from lenders or a governance token and are expressed as an annual percentage yield (APY).

Yield farming in DeFi is a generic term , it can be done in several ways.

Liquidity mining is one of the subcategories of yield farming. To ensure that traders’ needs are always met, Decentralized Exchanges reward their users for filling pools with liquidity and serving as a “Liquidity Providers” (LP’s). As a LP, your contribution earns you a portion of the fees paid by buyers and sellers on each trade.

Crypto staking involves “locking up” a portion of your cryptocurrency for a period of time as a way of contributing to a blockchain network. In exchange, you can earn rewards, typically in the form of additional coins or tokens.

Crypto lending refers to a type of Decentralized Finance that allows investors to lend their cryptocurrencies to different borrowers. This way, they will get interest payments in exchange, also called “crypto dividends”. While staking helps secure a network , lending allows investors to passively earn interest to help facilitate trading.

Benefits of Yield Farming

Passive Income

Yield farming is a passive way to make money. By providing liquidity investors will automatically earn interest over time.

Portfolio Diversification

Cryptocurrency investments are incredibly volatile and can swing wildly in price. By investing in different cryptocurrencies and different strategies , you can help reduce the overall risk of your portfolio.

Higher Returns than Saving account and other traditional investments.

Yield farming is one of the greatest alternatives to saving money in savings accounts because it offers a higher yield. It offers higher profits than almost any other traditional investment from stocks and bonds to real estate. Yield farmers may earn substantially more interest by yielding than they would by keeping their funds at a regular bank.

Risks of Yield Farming

Impermanent loss: The value of your cryptocurrency could rise or fall while it is staked, creating temporarily unrealized gains or losses. Thes profits or losses will be permanent when you decide to withdraw your coins.

Smart contract risk: The smart contracts can have bugs or be susceptible to hacking, putting your cryptocurrency at risk.

Liquidation Risk ; the moment you consider pulling out your money or crypto from the pools or projects but it is more related to a strategy problem.

Volatility: while they are locked up, the price of your underlying can fluctuate

Rug pulls /scams: Rug pulls are a type of exit scam where a cryptocurrency developer gathers investor funds for a project then abandons the project without returning investors’ funds. The previously mentioned CipherTrace report noted that nearly 99% of the major fraud that occurred during the second half of the year was due to rug pulls and other exit scams, which yield farmers are particularly susceptible to.

Gas fees This is a problem for DeFi yield farming, especially for investors with smaller funds.

Regulatory risk: There are still many regulatory questions around cryptocurrency.

Conclusion

Yield farming can be lucrative but also carries a substantial amount of risk. Due to the ever-changing nature of the DeFi ecosystem, it is important for investors to stay up to date with the latest news and changes in order to make the most informed decisions.

Kiriin Labs AG is a Venture Studio and Innovator with a focus on nurturing the Fintech and Web 3.0 technology evolution.​ Our mission is the identification, development and scaling of disruptive and sustainable solutions. If you are interested in yield farming , stay tuned and follow us. ​

Glossary:

• Total Value Locked (TVL) is a measure of how much cryptocurrency is locked in DeFi lending and other money marketplaces. This indicator is useful for estimating the condition of the yield farming ecosystem. “Golden rule” sounds this way: the more value is locked, the more yield farming might be happening.
• Annual Percentage Rate (APR) is the amount of interest you pay annually. APR ignores the compounding impact.
• Annual Percentage Yield (APY) is an actual rate of return you earn on invested amounts. In this case, compounding interest matters.
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