Understanding CeFi, DeFi & Yield Farming - Part 5
Hello everyone, hope you all are doing good? I'm back with the Part 5 of this amazing series, Understanding CeFi, DeFi & Yield Farming. If you haven't read the Part 1, Part 2, Part 3 and Part 4, I strongly suggest you that by clicking here for Part 1, here for Part 2, here for Part 3 and here for Part 4. In today's article we would be looking at what is yield farming and how it works.
Yield farming is the process of locking your assets in a pool over a period of time and earn rewards for doing so. Assets locked in pools are liquidity of the projects, so in order to inspire investors to lock their assets, investors are rewarded in tokens for providing liquidity to the project.
Yield farming is one of the most lucrative business in 2021, as investors earn over 40% of their investment, sometimes even over 100% of their investment. Instead of just hodling your assets in your wallets, provide liquidity and earn cool passive income. Rewards are distributed to providers based on the APY or APR of the the pool which they invest in.
How does Yield Farming Work?
Knowing how Yield farming works is quite simple. Projects needs liquidity and users will be reluctant to provide liquidity with nothing in return, so projects thought of a wiser means to lure investors into providing liquidity for their projects, by rewarding them based on the liquidity they provide. Automated Market Maker (AMM) was created to help determine the price of assets in the pool.
The liquidity provided by users can be used to provide loans to borrowers who will then have to pay back with interest. The interest which is paid back by the borrowers will be distributed to liquidity providers. Liquidity providers also earn a certain percentage of all trades in the pool in which they provided liquidity to, based on the proportion of their share in the liquidity pool.
Below is an image of PancakeSwap liquidity page.
I hope you all found the article interesting and exciting. Do well to share your thoughts about the article in the comment section below. Thanks.
Wow, this is amazing and you explain what yield farming is in a nutshell. The truth is that yield farming has really helped alot when it comes to blockchain as we have seen major turn up when it comes to providing liquidity base on the reward involve.