Introduction to Yield Farming

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Hello friends, welcome back to this space, I feel happy each time you drop by this space to check out what I've dished. I want to believe you're getting value from my post...
Today I would love to share with us another interesting topic that will be of great benefit to you especially for those who seek passive income in this space.

Am talking about Yield Farming. This might be something new to some of us but trust me, am going to do my best to demystify this topic. Just follow me as I take you on this journey. Shall we? I believe your answer is yes... smiles.

What Is Yield Farming in Crypto?

Yield farming can simply be defined as the lending and staking of cryptocurrency in a decentralized finance protocol in order to earn additional token as reward for that activity. Yield farming is also referred to as liquidity mining. Over the years yield farming has gained popularity because of it advantage over the traditional saving method that brings interest.

Gone are the days when your saving or fixed deposit in the bank brings you massive return, I might be wrong though when considering some regions of the world but in Nigeria where I reside, you hardly get up to 5% interest on your savings over a remarkable period of time.

Since we have the privilege of going into yield farming, why not take advantage. For example, you have quite a number of assets in your wallet which is substantial, you could put them to use and generated more token at no cost, all you need to do is to properly understand the platform you want to use and know the terms and conditions.

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By lending or staking in a Defi platform which include Dex, you will earn something for yourself because you have just become a LP (liquidity provider). You will therefore be rewarded with the native or governance token of such Defi platform.

It's also important to mention that rewards are earned based on certain yardstick such as the amount of asset , the type of asset, the duration of participation in the case of staking and so on. This is what brings about variation in the returns for LP's

How does Yeild Farming Works

To engage in yield farming, you’ll need to connect your digital wallet to the DeFi platform of your choice, deposit necessary assets, and follow the platform-specific instructions.

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Generically, you deposit funds into a liquidity pool. Usually, this liquidity pool is what powers the Defi protocol in that it facilitates lending, borrowing and exchange of token. When users come to these platform for any of these service, I mean lending, borrowing and the likes, they are charged an amount as service fee.

This fee is what is shared as reward to the LP who have contributed to the availability of these resources and it is distributed to them according to their share of the liquidity pool.

It's also important to mention that some defi protocols mint tokens that are used to represent your deposit, for example, Compound Finance platform would represent your deposit ETH as cETH, you no more have eth but cEth once it gets into their system.

You could also this token in some other protocol that mints another token for you, it goes on an on like that and works pretty fine as long as you understand how this complex strategy works. Yield in it simplest form means staking or lending for rewards but when we go deeper, we would see other dimensions of this exercise just like the little I just talked about.

How Are Yield Farming Returns Calculated?

Yields are basically calculated annually in form of APR or APY. Although these two terms are used interchangeably even though they are distinct. I would love to quickly explain. APR simply means annual percentage Rate while APY means Annual percentage Yield.

Both calculation are actually annual based as you can see from the little explanation but then APR doesn't support Compounding or reinvesting one's earning. In other words, nothing like compound earning.

However, rewards can be difficult to estimate sometimes because of the competitive nature of yield farming. Moreso reward can also fluctuate. LP can also suffer what we call impermanent loss which brings about reduction in the value of crypto. I would delve more deeper as we go on in this topic.

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Conclusion

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There you go friends.I would love to wrap it up at this juncture. I want to believe you've gotten so much from this piece. As my usual custom is, I would always encourage that you DYOR to be sure of every financial step you would want to take as I won't be liable for any form of loss encountered by you.

Feel free to share with me your thoughts in the comment section. Thanks for your time once again. Gracias!

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^{Disclaimer: This post is made as an education and not investment advice. Digital asset prices are subject to change. All forms of crypto investment have a high risk. I am not a financial advisor, before jumping to any conclusions in this matter please do your own research and consult a financial advisor.}

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Regards
@lhorgic♥️

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