Yield farming involves the locking up of cryptocurrency holdings by users, which in turn earns them rewards.
Yield farming is a process in which users can earn rewards by locking up their funds and lending out cryptocurrencies via DeFi protocols, typically on the Ethereum network. This process allows users to earn fixed or variable interest, with the rewards being paid out in the form of ERC-20 tokens. Although yield farming can potentially offer higher rewards than traditional investments, the volatile market can also bring higher risks, and there have been cases of hackers exploiting vulnerabilities in DeFi protocols to steal cryptocurrencies. Currently, yield farming is primarily conducted using ERC-20 tokens on the Ethereum network.
How does yield farming work?
Yield farming involves adding funds to a liquidity pool, which is a smart contract that holds funds for a marketplace where users can exchange, borrow, or lend tokens. By adding funds to the pool, users become liquidity providers and receive rewards generated from the underlying DeFi platform. However, it’s important to note that investing in a cryptocurrency like ETH itself doesn’t count as yield farming. Instead, yield farming involves lending out cryptocurrencies on decentralized non-custodial money market protocols like Aave to receive a reward.
Experienced yield farmers often shift their funds between different protocols to chase higher yields, and it’s a complex process that requires a deep understanding of the Ethereum network and its technicalities. The rewards earned are based on the amount of liquidity provided, so those who earn significant rewards have a large amount of capital behind them. Yield farming is not easy money and comes with risks, especially in such a volatile market.
- Liquidity providers deposit funds into a liquidity pool.
- Your returns are based on the amount you invest, and the rules that the protocol is based on.
- You can create complex chains of investments by reinvesting your reward tokens into other liquidity pools, which in turn provide different reward tokens.
What’s so special about yield farming?
Why should we care?
Which projects are involved?
Other popular yield farming projects in the DeFi space include Uniswap, a decentralized exchange that uses an automated market maker system to facilitate trades, and SushiSwap, a fork of Uniswap with added features and token rewards.
A balancer is another DeFi platform that allows users to create customizable pools of tokens with different weights, offering an alternative to the fixed-weight pools found on Uniswap.
The Curve is a platform that specializes in stablecoin trading, allowing users to exchange stablecoins with low fees and minimal slippage.
Overall, there are many different yield farming projects to choose from, each with its own unique features and risks. It is important to do your own research and carefully evaluate the risks before investing in any yield farming project.
Who can get involved?
What can you do with yield farming?
Is yield farming sustainable?