In the world of web3, Decentralised Finance (Defi) can be regarded as one of the most important things that has ever happened. For a layman, Defi essentially means conducting all the financial activities without the involvement of any middlemen such as a bank. And one such application in the world of Defi is Yield Farming.
As the name suggests, yield means to produce and farming implies an activity of growing, mainly crops, but here it means money. So, yield farming is an investment strategy used by traders and investors to grow their crypto assets i.e generate returns from their holdings. It is very similar to the world of web2 where we deposit our money in the bank’s savings account and earn interest thereon.
To understand this, we would first need to understand the parties involved in the transaction.
Once a user has deposited their tokens in the pool, they are rewarded with a fee/ interest by the platform on which the liquidity pool is being hosted and hence it becomes an income-earning opportunity.
The pool acts as a marketplace to allow users to borrow and lend funds at a cost. Yield farming is mainly done on the Ethereum network and users get paid in ERC-20 tokens which are supported on the Ethereum blockchain.
Started in 2020, yield farming as an investing opportunity is growing manifolds. Some of the best yield farming platforms are -
Uniswap is one of the leading decentralized exchange platforms that also provides the option of liquidity pooling. More than $5 billion is locked on the platform which helps users generate returns of 20-40% APR. The platform accepts all the ERC-20 tokens. For every trade, the platform charges 0.30% of fee which is added back to the pool.
Aave is one of the leading Defi protocols that helps users to earn on their crypto assets. The total value locked on the platform is over $10 billion. A user can easily earn 4-8% interest APR on their holding via liquidity pools. The platform charges 0.09% fee which is in turn provided to liquidity providers as a part of incentives.
Curve finance is the largest decentralized exchange in the Defi world. The value locked on the platform is over $7.5 billion. The liquidity pool helps the users to earn up to 30% APR. According to the official website, the fee on all pools is 0.04%, of which 50% goes to liquidity providers, and 50% to veCRV holders (members of the DAO).
Once a user has deposited the funds in the liquidity pool, the funds are then further used to lend out to borrowers for trading, arbitrage opportunities, etc
Pick a defi platform and demonstrate the steps of getting started
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