Blockchain technology and the concepts of cryptocurrencies and smart contracts have resulted in significant innovation in recent years. After the Bitcoin long run and all of the hype around the first cryptocurrency, many tech-enthusiasts were looking for better ways to leverage blockchain features.
Smart contracts were among the most important innovations that resulted from the blockchain. They are designed to automate many kinds of operations – especially in the finance industry.
Decentralized financial services/applications – or DeFi – are exciting products that use various features from blockchain – specifically smart contracts – to disrupt the financial sector.
DeFi has been on the rise in recent years, and every day a new project in this field comes to life. Yield farming is one of the most famous products of the DeFi era that helps users earn money from their cryptocurrency holdings or their activity in applications.
Yield farming helps crypto users earn money, although the earning may not be as much as high-risk trading.
Users can make money because they participate in DeFi platforms or provide liquidity in them. In simple words, yield farming – also called liquidity mining – rewards you for being active or staking money.
There are some different methods of yield farming that each one has a specific form of rewarding users. The most common one pays a small share of transactions in the blockchain to those who have locked their assets for liquidity providing. But many platforms reward users based on their activity in the DeFi application. In simple words, the more you use a DeFi application, the more project token you will receive.
Most of the yield farming activities are based on stablecoins. Yield farmers prefer them because of the ease of mind in volatility and the easy way of tracing the profits. There are multiple yield farming services that accept cryptocurrencies like ETH, though.
How To Make A Profit With Yield Farming?
Yield farming has become a method of investment for many users. Because of the boom in DeFi applications in 2020, many users looked for more innovative ways to earn rewards.
As a result, there are now many ways to invest in yield farming. The most common is investing in multiple projects and staking tokens in a group of DeFi applications.
Early investment in DeFi applications has a great chance of more rewards for investors. The projects often reward early adopters with more tokens, and their tokens – mostly governance tokens – experience a rise in value immediately.
Yield Farming Platforms
Multiple yield farming platforms provide various types of staking and farming. Each one has a specific staking and reward distribution method that can win customers over the other ones. Famous yield farming platforms have been successful in attracting a considerable amount of users and rewarding them. You can read about some of them below.
As one of the most successful yield farming platforms, Uniswap attracted many farmers, and there are billions of dollars of locked capital in that.
The most crucial aspect of Uniswap is the automatic market maker (AMM) protocol that allows investors to trade with smart contracts.
In other words, the platform does all of the calculations and automation needed in the trading process. Uniswap yield rate is fixed on 0.3% and distributes it for every transaction.
Curve platform is not that different from Uniswap but focuses on stablecoins more. The platform supports many coins like DAI, USDC, USDT, TUSD, BUSD, sUSD, and PAX. Because of the stablecoin focus, the risk of volatility in earned tokens’ value is less than other platforms. Curve swaps stablecoins and doesn’t force users – unlike many other yield farming platforms – to initially trade their tokens to a middle cryptocurrency like ETH.
Sun is the yield farming protocol based on the TRON blockchain. Its name comes from the name of TRON founder, Justin Sun. Launched in August 2020, Sun focuses on USDJ and JST tokens but will indeed look for other tokens to attract more farmers and move some of the yield farming activities from Ethereum to TRON.
Launched in July 2020, Yearn Finance is somehow different from other platforms in this list. After a month of launch, the project had about one billion locked assets in it. It didn’t offer premining and had no DEX platform. Experts believe that it has one of the most complex platforms.
Built on Flamingo, Flamingo.Finance is a cross-chain yield farming that tries to bridge the gap between famous platforms. It supports NEO and Ethereum blockchains. Multiple well-known tokens like USDT, USDC, DAI, ETH, wBTC, and wETH are supported in Flamingo.Finance, and the project promises to use more innovative farming protocols to increase users’ rewards.
Yield Farming Risks
There is no investment out there without risks. Yield farming, like ICO and cryptocurrency trading, has its dark points and moments. Many DeFi projects failed to protect staked capital. Although there is not much bad news about scamming in the yield farming ecosystem, many users have lost a fortune in some projects because of other reasons.
Security issues are the most common challenges and risks of losing money in yield farming. Multiple platforms raised some million dollars of staked cryptocurrency from farmers but lost many – if not all – of that in security breaches. Furthermore, many farmers stake hundreds of thousands of dollars in DeFi projects hoping for more reward. Still, if a significant market drop happens, they will face a considerable risk of liquidation.
DeFi projects often use smart contracts as their underlying technology. Sometimes the code of these smart contracts is not fully audited and even can be a copy of another project. Yield farmers have to pay attention to the underlying code and look for an audition because a fault codebase may result in project failure.
Because of the common risks in cryptocurrency investment and yield farming, complex investment is the best option. You better stake your money in multiple yield farming platforms to cover the risks of a security breach or market drop.
Earning rewards based on staked money is not a new concept. But yield farming tries to translate it into the new era of blockchain solutions. With multiple DeFi products emerging to the market, more ways to earn money from holdings should become available.
After all, the importance of risks and threats in new innovative solutions is still there, and investors should enter this new concept with full knowledge about projects and their leaders.