5 Yield Farming Methods of DeFi

muratkbesiroglu (78)in Project HOPE • 3 years ago

In today's article, I would like to talk about Yield Farming methods used in decentralized finance. First, let's start by explaining what Yield Farming is.

The term "yield" means "an amount produced of an agricultural or industrial product" in English. So, "yield farming" essentially refers to the pursuit of a return. In this context, Yield Farming is the activity that serves to earn more crypto with cryptocurrencies.

Applications specializing in yield farming in the Defi market are called yield-aggregators. According to the Defi Llama site, there are still 63 yield-aggregator applications. For the full list: https://defilla.com/protocols/yield.

So what Yield Farming strategies do these apps use to lure their customers? How strong are the methods used? What about their sustainability? Is it easy to understand and apply, or is it difficult and complex like rocket science? Without further ado, I would like to move on to strategies.

Compound Interest Effect

The most popular method of increasing returns is the automatic addition of return on investment to the principal. The compounded yield of crypto investment instruments such as liquidity pools and staking pools is significantly higher than the simple return. For example, a liquidity pool that provides a daily return of 1 per thousand provides 36.5% per year with a simple interest account. However, when the interest earned is invested in the same liquidity pool daily, the annual return rises to 44%. The higher the daily rate of return, the more dramatic the compound interest effect becomes. Yield-aggregator applications automatically reinvest pools' returns into the pool, enabling savers to earn higher returns.

Giving Tokens in Addition to Income

In the Defi space, applications provide additional benefits to their customers by cooperating. Yield farming sites, which provide the opportunity to invest in the liquidity pools of decentralized exchanges, increase the return by adding their own coins. For example, Bunny, collaborating with Pancakeswap, gives coins of both platforms to customers using their pools. In this way, the applications of the same ecosystem support each other.

Adding Commissions to Income

In some yield farming setups, liquidity pools can give customers a share of the pool's commission income and the token of the relevant swap application.

Incentives of Listed Cryptocurrencies

Investors visiting Yield Farming sites are potential buyers of newly recognized cryptocurrencies. Less-known crypto communities provide some incentives through yield farming practices to appeal to this highly crypto-literate audience. These incentives are often implemented by giving the cryptocurrency to stakers of yield farming app's coin from relatively little-known coins. Although, sometimes, the well-known coins of the ecosystem are also distributed with this method.

Leveraging Liquidity Pool Returns

Leveraging liquidity pools was one of the practices of Defi that doubled my horizon. The system operates using the money we deposited in the liquidity pool as collateral, withdrawing a loan, and depositing the fund created into the liquidity pool. Thus, the liquidity pool returns can be increased up to 3 times. It may be a reasonable strategy to use this yield farming method, which can be realized through Alpaca Finance, with 2x leverage. Because as the leverage ratio increases, the risk of liquidity of our investment also increases.

Finally, I would like to point out that some yield farming features are also offered by decentralized exchanges. For example, yield farming applications such as https://cubdefi.com/ automatically reinvestment yield, and with https://cubdefi.com/kingdoms option, additional yield is added Pancakeswap pools.