The cryptocurrency market has recently witnessed the sweep of investors through a method known as yield farming. So, what is yield farming and why is it having such a big impact on the decentralized financial system? Let’s consider the pros and cons of this financial investment method below.
The trend of decentralized finance (DeFi) has been one of the leading factors in the innovation of the blockchain space in the last few years. DeFi applications are attractive because no permission is needed, which means that anyone with an Internet connection and a cryptocurrency wallet can interact, do business, and earn a profit on a non-financial platform. DeFi applications save users from having to trade through any escrow institution or middleman. With its open spaces and protocols, DeFi also brings huge returns to investors through its yield farming feature.
For shark investors in the decentralized financial market, yield farming has been no stranger to recent years. This method has helped many investors get huge bargains in a short time.
What is Yield Farming?
Investors start yield farming by transferring cryptocurrencies into a decentralized financial system known as a liquidity pool. Then, the DeFi platform can transfer the fund in a liquidity pool to borrowers. Investors receive profit including the commission of the transaction fee and the token reward from the system. Each decentralized financial system that allows yield farming will reward users with tokens corresponding to the currency that investors pour into the liquidity pool.
Here is the factor that attracts thousands of investors to flock to yield farming. The system allows users to use the token rewards to reinvest in different decentralized financial systems and continue to earn profits. This is compound interest. Profits are continuously generated from profits.
To evaluate whether a yield farming platform is reliable and has the potential to invest, investors should look at the Total Value Locked rating research. The more assets locked on the system, the stronger and more reputable the system is. From there, the investor can decide to invest the cryptocurrency in the potential DeFi system to make a profit.
People who own a small amount of cryptocurrency but still want to participate in yield farming can consider using the collateral feature of the decentralized financial system. This feature requires users to mortgage a cryptocurrency on the system to be able to borrow. However, the mortgage must be of a large loan amount to avoid fraud.
In the decentralized financial market, the value of cryptocurrencies changes hourly, and accordingly the profit margins will also change rapidly. If the value of your collateral falls below the threshold allowed by the regulatory protocol, the system automatically liquidates all collateral on the open market. Therefore, users need to carefully with mortgage strategy to yield farming, avoiding losing all their assets.
Investors often use many different Defi platforms to optimize profits based on the amount of money they spend. These platforms will offer some variation of Lending & borrowing incentives from the Liquidity pools themselves.
Some reputable platforms you can refer to are:
Compound: is a protocol for borrowing and lending assets, the interest rate is adjusted according to each algorithm. Investors can still earn Compound governance tokens.
Aave: Here users can borrow assets themselves and earn compound interest on lending in the form of Aave tokens. This Aave protocol also facilitates fast loans, loans granted to borrowers without collateral or credit authorization.
MakerDAO: allows users to lock up cryptocurrencies for collateral to borrow DAI – a stable coin with a value equivalent to 1 USD. The monthly interest is paid in the form of a stable fee.
Balancer: does not require lenders to add similar liquidity to two pools. Accordingly, the liquidity provider can create custom liquidity pools for different token ratios.
Uniswap: allows users to swap any pair of ERC20 tokens without intermediaries. Liquidity Providers must value Tokens in a 50/50 ratio on either side of the liquidity pool. In return, they will receive a percentage of transaction fees or UNI governance tokens.
Synthetix: allows users to create crypto assets to participate in Yield Farming.
Pros and Cons of Yield Farming
The investor earns passive income from idle cryptocurrency in his e-wallet
By continuously exchanging the token rewards from yield farming on different decentralized financial platforms, investors get many times higher returns.
Transactions on the decentralized financial system are based on smart contracts and without intermediaries. Thereby, ensuring publicity and transparency for users.
Yield farming helps users make a profit even with stable coins that inherently have few large fluctuations in value.
The limited number of cryptocurrencies leads to a great demand for borrowing. This is the premise to invest in yield farming with long-term profitability.
With an effective investment strategy, users can earn passive returns of up to 50% a year regardless of market fluctuations or cryptocurrency prices.
Although smart contracts are generated by the system automatically, there is still a risk of fraud or hacker attack.
Yield farming comes with a series of continuous transactions, in a short time that requires investors to calculate and study carefully to avoid losses.
Although one of the newer concepts, yield farming has gained popularity because of its ability to earn passive profits through permissionless liquidity protocols. Yield farming has changed the way investors keep their money. Recently, large volumes of idle cryptocurrencies have been transferred into the liquidity pool, and make super huge profits for investors.
Yield farming is an extremely attractive passive income investment method from cryptocurrencies. This method brings about 100 times higher interest than traditional savings at banks. Compared to traditional investment channels such as real estate, stocks, bonds, etc., yield farming offers higher returns than all those channels.
To help investors profit from yield farming, many supporting service platforms have been born to maximize profit margins. Most importantly, investors completely have the right to control their assets on these service platforms. The service platform only plays the role of providing complete information, detailed market advice along with a team of very experienced experts in the field of yield farming. Through service platforms that support yield farming, users can judge and make the right strategy to earn the highest profit.