Since the summer of 2020, decentralized finance (DeFi) has been on fire. Due to this, many investors have turned to yield farming as a way to make even more capital with their capital. This emerging financial technology (DeFi) has produced many Crypto billionaire over the past few years, you too can take advantage of the many opportunities offered by DeFi to create a passive income machine for yourself.
What is Yield Farming?
Yield Farming also known as Liquidity Mining is the process of staking or lending crypto assets in order to generate high returns or rewards in the form of additional cryptocurrency. You can think of yield Farming as a parallel to crypto staking. In staking, your deposited cryptos get locked and you earn interest on them, For example, In Ethereum 2.0, when you stake 32 Eth tokens in the network, you become a validator, thus you are able to receive interest on your holdings. Yield Farming, on the other hand, is much complex than staking And you can’t imagine yield Farming without liquidity and pools. Liquidity Providers plays a crucial role in Yield Farming. Don’t worry, if you don’t understand, there is a more elaborate explanation below.
The Difference between Staking and Yield Farming
Now many people use terms like yield farming, liquidity, and staking interchangeably, but there are differences in what they mean and how much money you can make with them. Let me say that staking and yield farming are similar in the sense that they allow investors to earn return on their assets.
Staking refers broadly to the rewards that you get through the validation process of a proof-of-stake blockchain. All cryptocurrencies have a consensus mechanism, which basically means they have a system that verifies transactions on their ledger. Those who verify transactions are paid for their efforts in crypto.
The verification process is not easy, otherwise bad actors can come in and attack the system., So a good way to make it difficult to verify transactions is by requiring resources to do the verification. This can be done through mining. A cryptocurrency like Bitcoin does, which needs a lot of electricity and powerful computers to verify transactions or through staking your cryptocurrency. Now Staking allows you to verify transactions by essentially locking up or staking that currency with a validator.
The model basically says: if you have money in the system, you’re unlikely to be a bad actor, so you can be paid rewards for locking up your currency and helping to facilitate the system. The rewards are paid in proportion to how much of that crypto you hold.
So if you hold 100 coins you’ll receive ten times more Staking rewards than someone who holds 10 coins. Staking rewards are typically around 4 % to 10 % annually, but some reach as high as 100 % or more.
How Do you Stake Your Crypto?
Unfortunately, each crypto is slightly different, but the most user-friendly way is by going through an exchange like Binance, who offers fairly good staking rewards. Or you can stake directly from your crypto wallet to what’s called a Stake pool. Staking is a great option. If you plan on holding a crypto long term.
But yield farming is a bit more intense, which means the potential for a higher return for an educated investor.
Unlike Stacking, yield farming takes a bit more effort and deeper understanding of cryptocurrencies and the risks involved. So buckle. In. You’re doing more than just putting your held coins in a stake pool to help facilitate transactions. Instead you’re allowing your coins to be used to facilitate transactions in a decentralized exchange, something like PancakeSwap.. This is called providing liquidity in a liquidity pool. So your coins are used by a decentralized exchange to let other users borrow or trade cryptos through swaps.
I like to think of providing liquidity as a small business, because you lock up your crypto in these liquidity pools and you’re paid a percentage of all the transaction fees that that pool earns.
So if you’re providing 50 % of liquidity in a pool, meaning 50 % of the currency in that pool, is your currency? You get paid 50 % of the rewards, which means 50 % of the fees generated you receive, which can be a lot of money.
Now, there’s another layer to this comparison and that’s called liquidity mining. With liquidity mining you’re, still allowing your coins to be used in a liquidity pool and you’re still earning a portion of the transaction fees. But on top of this you also receive additional tokens which you can trade on exchanges for additional cash.
Things to note before Investing in Yield Farming
- Farming returns are calculated annually.
- Annual Percentage Yield ( APY, ) and Annual Percentage Rate ( APR ) are two common metrics which tell you your estimated returns.
- The difference between APY and APR is that APY considers the effect of compounding while APR does not Yield.
- Farming is not easy, as it may seems. There are some risks present in it. The first risk is COMPLEXITY, Yield Farming strategies can become too complex, And that’s why they are only recommended to Advanced Users.
- Also Yield Farming is more suited to those who have additional capital to deploy. Less capital may not bring you similar gains And it is more likely you’ll loose majority of your gains in transaction fees
- The most obvious risk of DeFI is of smart contracts, Since DeFi is permission less, meaning any developer can deploy his/her code, bugs are common in unaudited smart contracts.
- Scammers can deploy Fake Projects and after attracting Liquidity on their platform, they take out all the liquidity and the token and disappear, so it is good to invest only on projects with good prospects
- Although Yield Farming involves a lot of risk, But a well planned strategy can deliver you up to 4 Digit APY.
Investment Strategies and Tips
- The most often used strategy for yield farming involves using an Automated Market Maker or an AMM.. It is just like the swap we mentioned earlier, you have to hold two cryptocurrencies in a Liquidity pool, so the pool will use your cryptos with other cryptos to facilitate transactions in the pool and pay you percentage which you can redeem depending on the exchange you are using.
- The are many Liquidity pool or farm you can explore on Binance, Pankeswap, UniSwap , SushiSwap, etc, follow the link, read all their terms and condition and start creating a passive income machine for yourself.
- I have about 4 Liquidity pools that has earned me over 6 figures in the past two years. My strategy is simple, I take time to explore all the available farms on Binance, Pankeswap and UniSwap, and make my decisions based on available projects and their prospects.
Try an explore most of this Crypto exchange site and take a look at the project on their liquidity farm or pool. One good project can be a good money making machine for you. All the best