What exactly is DeFi yield farming? We’ve got your back if you’re taking your first DeFi steps! Wouldn’t it be great if cryptocurrency holders could make extra crypto by lending their crypto? There is, however, an interesting concept known as yield farming! Yes, you may earn cryptocurrency by assisting people in obtaining loans using your crypto holdings. Winner, winner, crypto is paying for your dinner. How does it function? Do I need any specialized equipment? Plows in the digital age? Horses on the internet? No, horses aren’t required in this. But we appreciate that you are asking pertinent questions. Let’s take a peek at the field and see what DeFi yield farming is all about!
What is a Yield in Crypto?
In cryptocurrency, yield is a measure of how much revenue a trader may recover on investment over time. It is determined by dividing the price per coin by the yearly return promised to investors. A low yield indicates a long-term profit, while a high yield indicates a short-term profit.
What is DeFi Yield Farming?
At its heart, DeFi yield farming is a technique that enables cryptocurrency users to lock up their assets and earn rewards. It is a technique that allows you to earn either fixed or variable interest by investing crypto in a DeFi market.
Simply stated, DeFi yield farming is the practice of lending cryptocurrency via the Ethereum network. When banks make loans using fiat money, the amount loaned is repaid with interest. The idea is the same with yield farming: a cryptocurrency that would otherwise be sitting in an exchange or a wallet is loaned out through DeFi protocols (or locked into smart contracts in Ethereum terminology) in order to earn a return.
Yield farming is often done out on Ethereum using ERC-20 tokens, with the rewards also being in the form of an ERC-20 token. While this may change in the future, almost all present yield farming transactions occur in the Ethereum ecosystem.
How to Get Started with DeFi Yield Farming?
To begin DeFi yield farming, you must first join a liquidity pool such as UniFarm. You’ll also need assets in your linked wallet, often Ethereum or ERC-20 tokens. Then, choose the liquidity pool of the asset to which you want to lend and enter the required amount. Any costs, as well as anticipated profits, will be shown to you. It’s time to start earning once you’ve contributed to the liquidity pool.
Rewards will be paid out at a minimum level that varies depending on the platform and asset you choose. Borrowers may also choose the amount and duration of their minimum payments. Also, bear in mind that in order to get any substantial profits, you’ll need to commit a considerable quantity of liquidity.
Yield farmers, as well as the majority of procedures and platforms, estimate returns in terms of yearly percentage yield (APY). The annual percentage yield (APY) is the rate of return on a particular investment over a period of a year. The APY includes compounding interest, which is calculated on a regular basis and applied to the amount. Yield farmers have been pursuing eye-popping thousand percent APYs since the DeFi summer of 2020.
Now you might be wondering, who are yield farmers? They are, simply put, people who invest in the crypto market in order to harvest yield. Yield can be thought of as profit gained from an investment.
To read more about how to calculate APY on UniFarm, check out this blog: How to Calculate Total APY in UniFarm?
DeFi Yield Farming Interest
Assume you put X number of stablecoins into the pool, and you now own 1% of the pool.
Your deposited assets will reflect the overall ratios of the pool’s available funds, and your percentage portion of the total pie will be shown appropriately. When you deposit stablecoins that would otherwise be sitting in your wallet unutilized, they are really wrapped as what is known as Y tokens, and then your tokens go in whatever ratio you desire.
So, anytime a user trades any of the exchange tokens, you will receive a specific percentage share of that value, making you the liquidity provider.
Keep in mind that the more money you deposit, the greater the interest rate you will get.
You will also receive a market-making charge on your stablecoin deposits because when customers exchange one crypto coin for another, they will pay a fee. As a result, for each swap, you will receive a portion of the charge on each transaction.
Because they are decentralized exchanges, you have complete control over your digital assets and may withdraw them at any time to your own wallet. You may earn income as well as market-making fees on your idle crypto assets this way.
What is the Method of Calculating Returns?
Yield farming is a form of investment, and with investment comes the need to calculate the returns. In general, annualized rates are used to compute expected DeFi yield farming returns. The rates utilized are APY (Annual Percentage Yield) and APR (Annual Percentage Return), which are computed similarly to traditional lending and investment. The distinction is that the APR does not account for compounding, whereas the APY does.
The APR is computed as follows: Periodic Rate x Number of Periods in a Year. For example, if it is for a year and the rate is yearly, the APR is just the yearly rate.
The annual percentage yield (APY) is determined by multiplying the periodic interest rate plus one by the number of periods in a year and subtracting one. Why is the rate multiplied by one? Because compounding works in this way. To get the actual rate, remove the one after it. As a result, the APY is computed as follows: APY = (1 + Periodic Rate) x Periods-1
When it comes to yield farming, how do these rates play a role? Let’s take a look at staking. When you stake, you’re locking your assets for a defined length of time and getting compensated in the same or a different asset. If the asset is the same, the payout (inflation) is usually re-invested in your staking funds and therefore back into staking. This means that you are compounding your initial stake for the time your money is locked.
Yield from LP
It’s a little different for LPs in an AMM. With your staked two-sided liquidity, you aren’t guaranteed a yield because it is dependent on how frequently the pair in the pool is traded, which affects the fees you earn and hence your return. Furthermore, unlike staking, where you are HODLing your asset, your overall return is impacted by the temporary loss that is guaranteed to occur.
Yield Farming is a method of earning money by locking the assets of the player’s house. Typically, the assets are cryptocurrency. It operates nearly identical to the creation of savings in conventional banks, but the deposit procedure is simpler, and the interest rate is more appealing. After reading this evaluation, you should have a better understanding of what yield farming is and the top yield farming platforms. Hopefully, the information in this blog has provided you with a better understanding of how to create passive income from cryptocurrencies.