One important application of decentralized financial systems (DeFi) is Yield Farming. Yield Farming is a strategy for making money from cryptocurrencies. In the Yield Farming strategy, individuals have rewarded a fee for lending their cryptocurrencies through smart contracts and platforms that offer Yield Farming.
Join Adaas Investment Magazine to answer the question “What is Yield Farming?”
To fully understand the concept of Yield Farming, we first need to study concepts such as liquidity pools, liquidity suppliers, smart contracts, and decentralized finance (DeFi) very quickly and easily.
A decentralized financial system was created with the goal of eliminating intermediaries such as banks and legislatures in finance. How to implement this process is a bit specialized, but in simple terms, blockchain technology and smart contracts based on this technology allow the implementation of a decentralized financial system and its easy use. In this financial system, you do not have age, sex, religion, geography, etc. restrictions to receive a loan, and with only one system connected to the Internet, you can do all your finances with the lowest fees.
Simply put, smart contracts are pieces of programmed code based on blockchain technology. The main purpose of innovating smart contracts is trust between users by computer.
Liquidity pool is an innovation created by the advent of DeFi and Decentralized Exchange (DEX). Decentralized exchanges provide all assets that can be traded through liquidity pools. Liquidity pools are a smart contract.
People who put their assets in liquidity pools are defined as liquidity Providers. These people receive a fee by locking their assets in these smart contracts.
Obviously, you understand the process of making a profit in liquidity pools. People receive rewards by locking their cryptocurrencies in these contracts, which are also in the form of cryptocurrencies.
This process of making a profit is called Yield Farming. This innovation is currently underway in the Ethereum Network and its decentralized finance protocols, and individuals can select tokens defined on the Ethereum platform in Yield Farming projects and lock in Decentralized Finance liquidity pools to make a profit.
As you may have noticed by now, Yield Farming is making a profit by providing liquidity in the liquidity pools of decentralized exchanges. On the other side of the stacking process is the locking of digital assets in “Proof of Stake | PoS” networks to verify transactions. In both Yield Farming and Stacking processes, people receive rewards in the form of cryptocurrencies by locking their cryptocurrencies, but the difference is in the technical aspects of these processes.
Due to the beginner to intermediate level of this article, we have avoided explaining these technical differences professionally!
The “Total Value Locked | TVL” is one of the best ways to check the soundness of decentralized finances and Yield Farming projects. The TVL index represents the total value of cryptocurrencies locked in DeFi lending platforms, and in simpler terms, this index represents the sum of the total liquidity in liquidity pools. Many people use this index to analyze the health of Yield Farming projects.
In the following, we have shown you the DEFI PULSE site, which shows the total value locked index in decentralized finance (DeFi) in dollars. Obviously, the growth of this index indicates the confidence of investors and the growth of this innovation.
The biggest advantage of Yield Farming innovation is the amount of profit from this investment. The relationship between fast participation in new Yield Farming projects and the amount of profit is a linear and direct relationship; Of course, the timing of the sale of reward codes also has a significant effect on the profitability of Yield Farming.
On the other hand, just as Yield Farming provides significant benefits to investors, it poses great risks to investors. The emergence of decentralized financial technology is causing projects to be attacked by hackers. Also, technical problems in developing smart contracts put investors in a position to accept large investment risks.
There are several platforms for investing in Yield Farming, we have published the best investment platforms through Yield Farming in Adaas Investment Magazine. Note that this list will be updated with the emergence of powerful new platforms that will gain market dominance.
Numerous other platforms have been developed for Yield Farming, including Curve Finance, Balancer, Yearn. finance, which offers many features for Yield Farmers. The final decision to choose the Yield Farming platform is made by the individuals themselves with the knowledge of the investors themselves.
At Adaas Capital, we hope that by reading this article you will find the answer to the question “What is Yield Farming?” Comprehensively. You can help us improve by sharing the article “What is Yield Farming in DeFi?” Published in Adaas Investment Magazine, and help optimize this article by submitting your comments