- Yield farming allows you to lock up funds while providing rewards.
- It’s about borrowing cryptos via DeFi protocols to earn fixed or floating rates.
- The rewards can be far higher than traditional investments, but higher rewards come with higher risks, especially in such a volatile market.
It is impossible to sail the crypto seas without constantly navigating through new trends and buzzwords. One of the newest that you’ve come across lately is Earning Farming – a reward system that took the world of decentralized finance (DeFi) by storm in 2020.
Arguably one of the main reasons people are drawn to the DeFi world, income farming has resulted in inexperienced investors being burned and tech-savvy capitalists making their fortunes.
As with most things related to blockchain and cryptocurrency, the concept of income farming can be intimidating at first, but fear not – we’re going to cover everything you need to know below, starting with what it is, how it works, and why you are may be interested to explore further.
What is income farming and what does it mean for the world of crypto? Without further ado, let’s dive in.
What is crop farming?
At its core, yield farming is a process that allows cryptocurrency holders to lock in their holdings, which in turn gives them rewards. In particular, this is a process that allows you to earn either fixed or floating rates by investing crypto in a DeFi market.
Simply put, yield farming involves borrowing cryptocurrency through the Ethereum network. When loans are made through banks with fiat money, the amount loaned is repaid with interest. In income farming, the concept is the same: cryptocurrency that would otherwise be sitting in an exchange or wallet is borrowed via DeFi protocols (or tied to smart contracts in Ethereum terms) for a return.
Yield farming is usually done with ERC-20 tokens on Ethereum, with the rewards being some form of ERC-20 tokens. While this could change in the future, almost all current income transactions take place in the Ethereum ecosystem.
How does productive agriculture work?
The first step in profitable farming is to add funds to a liquidity pool, which are essentially smart contracts that contain funds. These pools provide a marketplace where users can exchange, borrow, or borrow tokens. Once you’ve added your money to a pool, you have officially become a liquidity provider.
In return for locking your finds in the pool, you will be rewarded with fees generated by the underlying DeFi platform. Note that investments in ETH itself, for example, are not considered profitable agriculture. Instead, ETH lending according to a decentralized, non-custody money market protocol like Aave, which then receives a reward, is a profitable agriculture.
Reward tokens themselves can also be placed in pools of liquidity, and it is common for people to switch their funds between different protocols for greater returns.
It’s complex stuff. Yield farmers are often very experienced with the Ethereum network and its technical details – and will transfer their funds to various DeFi platforms for the best returns.
It is by no means easy and certainly not easy money. Those who provide liquidity will also be rewarded based on the liquidity provided, so those who receive huge rewards will have correspondingly large amounts of capital behind them.
A brief overview of high-yield farming
- 💰 Liquidity providers put funds into a liquidity pool.
- 💱 Deposited funds are usually stable coins pegged to USD like DAI, USDT, USDC and more.
- An Another incentive to add money to a pool could be to accumulate a token that is not in the open market or is of low volume by providing liquidity to a pool that rewards it.
- 📈 Your return is based on the amount you invested and the rules on which the protocol is based.
- 🔗 You can create complex investment chains by reinvesting your reward tokens in other pools of liquidity, which in turn provide other reward tokens.
What is special about productive agriculture?
The main benefit of productive farming, to put it bluntly, is sweet, sweet profit. For example, if you arrive early enough to take on a new project, you can generate token rewards that quickly increase in value. Sell the rewards for a profit and you can indulge yourself – or choose to reinvest.
At present, profitable farming can offer a more lucrative interest than a traditional bank, but of course there are risks associated with it. Interest rates can be volatile, which makes it difficult to predict what your rewards might be in the year ahead – not to mention DeFi is a riskier environment to place your money in.
Why should we care?
An insane amount of money was made (and lost) through the Ethereum network over the course of 2020 because of the revenue farming platforms built on Ethereum. And most, if not all, of the DeFi tools use the Ethereum platform. The explosion in popularity shows the extent to which the financial revolution DeFi promised is based on Ethereum – a relatively new network.
Yield farming is important as it can help projects gain initial liquidity, but it’s also useful for both lenders and borrowers. This makes it easier for everyone to take out credit.
Those who generate tremendous returns often have a lot of capital behind them. But those looking to take out a loan have access to cryptocurrency with very low interest rates – sometimes just 1% APR. Borrowers can also easily lock the funds in a high-yielding account.
Although the explosion in profitable agriculture has subsided somewhat after the summer 2020 boom, there is still an opportunity to get an oversized return on assets compared to that of the traditional financial world.
Yield farming has been a somewhat controversial topic in the crypto world. Not the entire community thinks this is important – and some members of the crypto community have advised people to stay away. For example, flash farms (high-yield farming projects that have only emerged for about a week) have been criticized by Ethereum developers for their high risk. The co-founder of Ethereum, Vitalik Buterin, has announced himself that he will be Stay away from income investments.
Which projects are involved?
There are currently a number of DeFi projects addressing high yield farming. Aave, a project that allows users to borrow and borrow a range of cryptocurrencies, is currently the greatest asset tied to smart contracts.
Next is Annual fundingThis is to move users’ funds between different credit and liquidity protocols (Compound, Aave and dYdX) to get the best interest rates.
Then there is Compound, a DeFi platform that people can use to make money from the crypto they have stored.
Who can get involved?
If you are new to the crypto world, it is difficult to get involved in income farming. Projects like Compound and yearn.finance work to make the world of borrowing and lending accessible to everyone.
But because income farming has resulted in high gas fees on the Ethereum network, those who make huge returns on borrowing their crypto are usually left with a lot of capital initially.
What can you do with high yield farming?
Top yielding farmers have made up to 100% APR on popular stablecoins using a variety of different strategies.
One strategy involves one of the world’s most popular DeFi platforms, Compound. The platform rewards investors with COMP tokens for providing and raising capital. Many users maximize their ROI by doing both:
- Lending funds on Compound offers COMP tokens as a form of cashback. The more you borrow, the more COMP tokens will be provided.
- If the cashback is worth more than the cost of the loan fees, you can still borrow to take advantage of the cashback rewards.
- Since Liquidity Miners are compensated for both lending and borrowing, one strategy is to lend the asset with the highest interest rate, borrow as much as possible against the tokens, and then return the remaining assets back to the credit pool.
- The bottom line (potential) is 100% APY instead of the 0.01% to 1.00% that most banks offer, which is a very significant increase.
Detailed strategies are beyond the scope of this article. However, the method essentially involves depositing and then borrowing. It goes without saying that it is extremely risky; As always, you should never invest what you cannot afford to lose.
Is Productive Agriculture Sustainable?
As reported by a number of Ethereum developers DecryptCertain income projects don’t last and are simply not sustainable. These projects often bring in large sums of money in a short period of time and are then forgotten. Some have even been described as scams – particularly the flash farming projects.
Other “experiments” in high-yield farming have involved experimental – and untested – code, which has led to unintended consequences.
Invest at your own risk. This is usually the general consensus of experts.
But DeFi yield farming platforms like the ones listed above will be around for a long time. They may not make the same amount of money in the years to come, but the world of credit will change.
The future of high yield farming
It’s practically impossible to accurately predict the future in such a fast-paced, volatile space. However, the general consensus is that the lucrative bubble is likely to burst at some point.
The current level of hype and expectation could potentially overload the network and cause problems with congestion. Resulting price adjustments could prevent some farmers from liquidating their assets, which could negatively affect general confidence in high-yield farming.
For the time being, yield farming remains a risky and rewarding practice that may be worth continuing as long as the necessary research and risk assessments are carried out in advance.
Disclaimer of liability
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment or other advice.