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Decentralised finance (DeFi), a growing financial technology that aims to take out intermediaries in financial transactions, has showed multiple avenues of capital for investors. Yield farming is a such investment strategy in DeFi. It calls for lending or staking your cryptocurrency coins or tokens to obtain rewards available as transaction fees or interest. That is somewhat much like earning interest from your bank account; you are technically lending money towards the bank. Only yield farming can be riskier, volatile, and complex unlike putting take advantage a bank.
2021 has turned into a boom-year for DeFi. The DeFi market grows so quick, and it's even hard to follow any changes.
Why is DeFi stand out? Crypto market provides great opportunity to enjoy better paychecks often: decentralized exchanges, yield aggregators, credit services, and even insurance - you can deposit your tokens in most these projects and have an incentive.
Though the hottest money-making trend has its own tricks. New DeFi projects are launching everyday, rates are changing constantly, a number of the pools disappear completely - and it is a big headache to keep track of it nevertheless, you should to.
But be aware that purchasing DeFi can be dangerous: impermanent losses, project hackings, Oracle bugs and high volatility of cryptocurrencies - fundamental essentials problems DeFi yield farmers face on a regular basis.
Holders of cryptocurrency have a choice between leaving their funds idle inside a wallet or locking the funds in the smart contract so that you can give rise to liquidity. The liquidity thus provided is known to fuel token swaps on decentralised exchanges like Uniswap and Balancer, or to facilitate borrowing and lending activity in platforms like Compound or Aave.
Yield farming it's essentially the method of token holders finding strategies to making use of their assets to earn returns. For that the assets are used, the returns may take different forms. For instance, by being liquidity providers in Uniswap, a ‘farmer’ can earn returns available as a share from the trading fees each and every time some agent swaps tokens. Alternatively, depositing the tokens in Compound earns interest, because they tokens are lent in the market to a borrower who pays interest.
However the risk of earning rewards will not end there. Some platforms also provide additional tokens to incentivise desirable activities. These additional tokens are mined with the platform to reward users; consequently, this practice is referred to as liquidity mining. So, for instance, Compound may reward users who lend or borrow certain assets on the platform with COMP tokens, what are the Compound governance tokens. A lender, then, not only earns interest and also, in addition, may earn COMP tokens. Similarly, a borrower’s interest rates may be offset by COMP receipts from liquidity mining. Sometimes, like in the event the price of COMP tokens is rapidly rising, the returns from liquidity mining can a lot more than atone for the borrowing monthly interest that has to be paid.
This sort of happy to take additional risk, you can find another feature that enables much more earning potential: leverage. Leverage occurs, essentially, whenever you borrow to invest; for instance, you borrow funds from a bank to buy stocks. In the context of yield farming, an example of how leverage is done is basically that you borrow, say, DAI inside a platform such as Maker or Compound, then utilize the borrowed funds as collateral for additional borrowings, and do this. Liquidity mining could make video lucrative strategy in the event the tokens being distributed are rapidly rising in value. There is certainly, naturally, the danger until this doesn't happen or that volatility causes adverse price movements, which could lead to leverage amplifying losses.
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