Yield farming is a method of earning rewards or interest by depositing your cryptocurrency into a pool with other users. The pooled funds are used to execute smart contracts such as lending cryptocurrencies that generate interest in turn.
How does yield farming work?
Yield farming works in various ways, where you deposit funds into a liquidity pool with others who invest in the same farm. Investing may require keeping funds invested for a specific period. Your cryptocurrency can be used as collateral or to provide liquidity for mining pools, depending on how it’s invested.
Examples of yield farming platforms
Yield farming platforms require specific cryptocurrencies to allow participation. Each yield farming provider may have its own rules and protocols. Below are some yield farming providers with unique offerings:
Aave:
With the Aave app, you can link your wallet to participate in supported cryptocurrencies or borrow from them. Ethereum-backed cryptocurrencies top the list of assets and liquidity in Aave.
Compound:
Compound is a market where you can lend currencies like Ethereum, Dai, and others at lower rates, reaching about 3% annually.
SushiSwap:
SushiSwap is a decentralized exchange that provides opportunities to earn profits from providing liquidity and lending your currency.
Yield farming vs staking
Staking is the process of depositing cryptocurrency. Anytime you earn rewards from specific cryptocurrencies, it can be considered a form of staking. This may be automatic or require additional steps to deposit the stake.
Advantages and disadvantages of yield farming
Advantages:
- The potential to earn higher interest rates online.
- Managed by smart contracts.
- Part of the global DeFi system.
Disadvantages:
- Risks of impermanent losses.
- High chances of scams and frauds.
- Challenges in tax reporting.
How to get started with yield farming
Here are the steps to participate in yield farming:
- Research yield farming investments.
- Link your wallet or fund your account.
- Participate in yield farming by depositing your currency.
- Collect your earnings.
Is yield farming worth it?
Yield farming is an exciting way for cryptocurrency enthusiasts to earn returns on their investment in cryptocurrencies, not just from the increase in token value. However, yield farming may not be worthwhile for many investors, especially new investors, due to the associated risks.
The idea of earning 100% or 200% or more in annual interest can be tempting. However, you should only participate if you fully understand how yield farming works and the risks involved. Conduct the necessary research on the platforms, currencies, and teams behind the yield farming you will participate in. All of these steps are essential to mitigate the risks associated with this investment.
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Source: https://www.thebalancemoney.com/what-is-yield-farming-in-cryptocurrency-5272063
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