Everything You Need to Know About Yield Farming
Over the past couple years, DeFi-based solutions have managed to successfully disrupt the current financial ecosystem by providing millions of people around the world with innovative profit-making opportunities. Out of all DeFi passive income tools, yield farming is among the most popular ones. But what is yield farming really, and how does it work?
What Is Yield Farming?
DeFi (decentralized finance) is based on the idea of replacing traditional financial mechanisms which utilize centralized intermediaries with blockchain technology and smart contracts. Yield farming can be summarized as the DeFi approach to lending assets.
In the world of outdated, centralized finance, lending money is something done almost exclusively by institutions like banks. The mechanism is of course very simple: a bank lends funds to people, and in return earns interest rate.
Yield farming completely disrupts the financial ecosystem by empowering anyone to earn money exactly in the same way as a bank. In other words, instead of simply keeping your crypto assets in a wallet, you can put them to work and be rewarded with interest.
How Does Yield Farming Work?
Yield farming means lending your digital assets to a blockchain-based platform. The tokens are being used to provide liquidity to the network, and in exchange for using your assets to support the platform, you are being rewarded with interest, which is generated from the fees of the users.
Very often yield forming uses stablecoins: a type of currencies which have their prices pegged to typical fiat currencies such as dollar or euro. The use of stablecoins helps to eliminate many risks involved in the typically high volatility of the crypto market. Removing rapid price movements means that DeFi enthusiasts can enjoy yield farming with relatively small risks compared to other methods of profiting from crypto.
Although the name “yield farming” might make the whole process seem unfamiliar or even confusing at first, the very concept is easy to understand when we compare farming yield on DeFi platforms to keeping traditional fiat currencies in a savings account in a bank.
When people keep money in a savings account, the bank lends their assets to other clients to earn interest, and in return allow the money-owners to earn a small percent of the profits. DeFi platforms remove the centralized intermediary from the question, making the whole mechanism much more profitable for the user.
Can Yield Farming Really Be Profitable?
In general, yield farming is considered a relatively safe form of making profit with blockchain technology. Compared for example to trading, where the risk is high, the chance of losing your funds with yield farming is negligible.
However, there’s always a risk of choosing a yield farming platform with low profitability. Even though doing that won’t make you lose money, earning very little interest can mean that yield farming won’t be much more profitable than keeping the assets in a wallet. In other words, choosing a quality DeFi platform is essential to make money with yield farming.
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