Welcome To This Week’s Episode On #cryptocrushwednesday!
We will study the concept of yield farming this week. Some today are ready to invest in cryptocurrencies and have not researched cryptocurrency farming. Yield farming is a broad category of investing with several sub-sectors.
You know how you get to create a savings centralized bank account that produces lower interest than the capital invested, right?
Yield farming produces more interest than the capital invested. Consider putting $1000 into an investment that yields $3000. That seems cool, right?
So what will we learn today?
- What is yield farming?
- Types of yield Farming
- How to calculate returns while farming cryptocurrency
- Is yield farming equivalent to staking?
- Yield farming protocols
- Is crypto safe in yield farming platforms?
- What are the risks in yield farming?
- Final thoughts
Yield farming strategically involves placing cryptocurrencies to earn more of them.
How Was “Yield Farming” Coined?
The financial term yield refers to the return on investment.
Farming is the action taken to generate income and financial growth. Individuals who participate in yield farming are called crypto farmers.
Remember how centralized investment systems vary from yield farming? Let’s learn more about that!
We’ll approach this section differently. We will learn the types of yield farming and learn how it functions.
- 𝗟 𝗟 𝗣
Liquidity providers handle liquidity pools. Oops, are you unfamiliar with a “pool”?
A pool is simply a gathering of various cryptocurrency investors’ investing money.
Investors in liquidity pools receive a portion of each transaction completed on the Decentralized Exchange. Do you mean the investor has to steal money from the exchange’s users? No!
Gas fees are used for each transaction on every cryptocurrency exchange. On the blockchain network, gas fees are the sum you pay for each transaction you complete, which is similar to bank charges on centralized banking systems. The investor’s money is used to fund all trades on the exchange, and a percentage of the proceeds from each trade is given back to the investor.
Platforms that use liquidity pools include uniswap, pancakeswap, quickswap, and more.
- 𝗟 𝗱
In exchange for lending cryptocurrencies to the Decentralized platform, users receive cryptocurrency as a reward.
Borrowing provides investors with trading capital and demands higher collateral than the money borrowed. Sounds crazy?
Imagine taking a cryptocurrency loan for $2,000 and committing $3,000 as security. As a result, borrowing is secure because investors are mandated to repay the borrowed money.
I have several cryptocurrencies in my wallet, why would I borrow them?
You might want to trade, but you probably don’t want to use your money to accomplish so. By borrowing money, investors might earn additional profits from transactions involving the loan that are more profitable than the capital borrowed and secured by collateral.
Staking involves earning cryptocurrencies as rewards from cryptocurrencies held or locked by the investor. After the maintenance period and the lock’s duration have passed, the traders’ rewarded cryptocurrencies are added to the initial cryptocurrency invested. Cryptocurrencies held in crypto exchanges help to maintain the blockchain system.
There is no trade involved with staking. The blockchain system is supported by the invested cryptocurrency while traders are rewarded for doing so. The majority of staking platforms use a proof-of-stake consensus technique.
The greater their investment, the greater their opportunity to suggest a new block and reap the benefits.
Yield farming investment returns are calculated using APY and APR.
The Annual Percentage Yield (APY) and Annual Percentage Rate are applied to calculate the returns from yield farming. APR determines the amount or rate charged annually for borrowing and lending money, while APY calculates gains from several investments or compound interest. Metrics like APY and APR help to estimate annual returns on investments.
When computing the interest earned from investments through compounding, most companies utilize the Annual Percentage Yield.
The formula for APR: Periodic Rate x Number of Periods in a Year
The formula for APY: (1 + periodic rate)ⁿᵘᵐᵇᵉʳ ᵒᶠ ᵖᵉʳⁱᵒᵈˢ – 1
Here’s what will happen; To understand how APR and APY operate, read more on this subject of compound interest and simple interest.
Staking and yield farming are not the same. Profits are produced in the near term via yield farming. Investors in yield farming liquidity pools can switch from the pool they originally invested in into a more advantageous pool. Staking, on the other hand, keeps investor money tightly locked up for a while.
Yield staking and farming liquidity pools can have advantages and disadvantages. Research your options and choose the one that best suits you.
𝗬 𝗲 𝗺
- Curve Finance
- PancakeSwap and more
𝗔 𝗔 𝗲 𝗬
This question makes me afraid, so let’s quickly go over the dangers of yield farming.
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Rug pulls are situations in which cryptocurrency companies flee with the money traders have invested and destroy any evidence. It causes numerous losses.
- Volatility leads to impermanent loss.
Volatility affects staking cryptocurrencies where the prices can deflate while the cryptocurrency is locked up for a while. It also leads to losses for the investors.
- Regulatory Risk.
Yield farming has shown to be a very successful form of investing. In addition to being profitable, yield farming is also risky, thus investors should be aware of these dangers before investing in yield farming. Yield farming has several risks, but it also has fantastic rewards.
“Not taking a risk is the biggest risk of all.” With this quote as a guide, let’s push ourselves intelligently.
This quote shouldn’t lead you to act foolishly due to FOMO. Before investing in yield farming, it is advisable to obtain extensive knowledge of DeFi, investment strategies, and how it works.
New to trading? Try crypto trading bots or copy trading