It is true that money does not grow on trees but only on money, and the same applies in all areas of finance, including cryptocurrencies. You put in a dollar in your bank. It yields something more.
It is true that money does not grow on trees but only on money, and the same applies in all areas of finance, including cryptocurrencies. You put in a dollar in your bank. It yields something more. However, banks are non-existent in the crypto world, and to make your crypto grow, you must take to crypto farming, commonly known as yield farming. As crypto thrives on the plank of DeFi or Decentralized financing, it has become a hot financial product that seems to break all growth records. Cryptocurrencies owe their origin to the innovations in the blockchain space that gained momentum from the DeFi movement.
The attraction of DeFi lies in its permission-free structure, which means that to carry out any interaction in the DeFi space, you need a wallet and an internet connection, and there is no role for any middleman or custodian. The free and unhindered interactions that can happen within the Defi space have resulted in the emergence of new concepts like yield farming. The new liquidity protocols do not require any permission, and those with cryptocurrency holdings can earn rewards by way of passive income by using the decentralized ecosystem built on Ethereum. Consequently, the HDOL patterns of investors are likely to change in the future.
What is yield farming?
Like farmers tend to their crops for better yields, crypto investors too must tend to their investments to make it grow by taking to yield farming which has another name of liquidity mining. It is a way to generate rewards for holdings of cryptocurrency. There can be comparisons between yield farming and staking in some sense. Considering that a lot of complex work goes on in the background, it works with Liquidity Providers (LP) in many cases for adding funds to liquidity pools.
What is a liquidity pool?
Any smart contract that contains funds is a liquidity pool. LPs get a reward in exchange for providing liquidity to the pool. The reward comes from fees emanating from the underlying platform of Defi or some other source. Paying rewards in multiple tokens is a norm for some liquidity pools. You can deposit those reward tokens to some other liquidity pools where again, you can earn some rewards, and the process goes on. You can see how fast complex strategies can emerge. However, the basic idea about earning is evident because an LP deposits funds in a liquidity pool and earns rewards for it.
The modality of yield farming
For yield farming, you must use ERC20 tokens on Ethereum and get back the same types of tokens as rewards. Although much of the yield farming is now happening within the Ethereum ecosystem, things might change in the future.
However, advancements like cross-chain bridges and other similar developments may result in Defi applications turning blockchain agnostic. In simple words, you might see in the future that DeFi applications are running on other blockchains that support innovative contract capabilities.
In search of high yields, yield farmers will typically maneuver their funds a lot between different protocols. As a result, other economic incentives are likely to be available on Defi platforms to attract more capital.
Can’t donate? Please share. Even a quick share on Facebook can help.
The average share raises $97.