Earn in Yield Farming! (>‿◠)✌

By Obito | 4Crypto Academy | 15 Feb 2023

What does it mean to farm cryptocurrencies?

One of the concepts that has become more famous in the current DeFi world is "Yield Farming". This is a concept that seeks to establish an investment strategy by which token holders seek to maximize their profits. To do this, token holders must invest and participate in various DeFi platforms while seeking profit maximization at all times. To really understand and understand the concept let's take a step back. In the description we already named it and it is to understand what DeFi is.

What is DeFi?

DeFi (Decentralized Finance) is the gear of the Blockchain. Its objective is to offer a series of services (loans, purchase of derivatives, etc.) built on a decentralized infrastructure allowing interaction with this platform without the need for intermediaries.

Depending on how DeFi is built, it will be possible to boost the world of finance in cryptocurrencies. "Ethereum" is one of the main options when choosing DeFi but there are many others such as:

MakerDAO. powered by the DAI stablecoin.
AAVE. It consists of a decentralized lending system.
Ox. Focused on building decentralized exchanges.
Auigur. It allows to develop markets of future predictions as the opposites.

How to create profits from cryptocurrency farming?

One of the services offered by DeFi is that it allows users to make investments using tokens and cryptocurrencies so that they can passively earn income, this being one of the concepts that has become more famous within DeFi and that is called yield farming.

Yield Farming, reaping profits in the fields of DeFi

As we discussed at the beginning of this article, yield farming is a strategy used by investors and large traders, to achieve the greatest amount of profit from their investments and capital.

The objective is simple: to have your capital in one or several investment platforms, so that after a while, said capital grows significantly. Simply put, yield farmers are only looking for investment opportunities that allow them to increase their capital.

A strategy that certainly looks a lot like staking, since the greater the stake, the greater the gain obtained.

However, to perform this activity there is no single recipe or form. On the contrary, yield farming is a strategy that must be adapted to the target platforms that are planned to be used for this purpose. Thus, yield farmers usually use their large capital or resort to large loans to achieve their goal. In short, it is a strategy with many risks but also with great opportunities.

In fact, given the nature of DeFi, where you can borrow immediately, and make investments and asset changes quickly, yields farmers take advantage of this ecosystem to make their investments and carry out their farming strategies. In this way, a farmer can achieve very high levels of liquidity in very short periods of time, leveraged by loans, conversions and well-positioned investments. The end result?

Big profits, not only because of interest spreads, but also because many platforms offer usage incentives that end up transforming into more capital for the farmer.

Pros and cons of Yield Farming

In the case of yield farming, the main advantages of this strategy are:

It is a strategy that can be carried out today with different targets or spaces. Currently, there are several DeFi protocols dedicated to yield farming, some of them with several years of operation and proven solidity.
It allows farmers to make fairly pronounced profits on their "harvests". Generally these crops occur in periods of 6 months to 1 year, and are reinvested to generate higher levels of profits. Indeed, yield farming is a strategy that favors whales of cryptocurrencies.

Among the cons we can mention:

It is a complex strategy and only recommended for people with advanced financial knowledge.
The implementation of the strategy favors those who have large amounts of capital to deploy, i.e. whales. A person with little capital may receive absolutely no profit, and in fact, can lose money by paying commissions.
Another serious problem is the security of the smart contracts of the yield farming platform. If the platform has not been properly audited, there is a risk of theft of funds and the partial or total loss thereof. This is not something isolated, in fact, cases like what happened in dYdX or bZx prove this point.

Platforms to take advantage of Yield Farming

Now, let's know some platforms in which we can put into practice this type of strategies:

AAVE

AAVE, formerly known as ETHLend is one of the first DeFi protocols that existed in the world of cryptocurrencies. Its launch was on par with MakerDAO, born from an ICO that managed to raise more than 17 million dollars by the end of 2017.

The idea behind AAVE is to create a market where the interest rate is defined algorithmically by supply and demand virtually second to lend or borrow assets. The most financial definition would be market money markets.

Its time in the crypto space and its quality have earned it to position itself today as one of the great DeFi projects in the world. In fact, at the time of writing it has a locked value of more than 1.5 billion dollars.

Curve

Curve Finance is one of the most curious DeFi products on our list. The purpose of Curve is to create liquidity pools and bond curves that serve to provide high-efficiency stablecoin trading and low-risk returns for liquidity providers.

In this way, Curve protects users from the price slippage they would normally face in DEXs when trading from one stablecoin to another.

Compound

Another great project in which we can put these two strategies into practice is Compound (COMP). This project running on top of Ethereum created a governance token called COMP, and at the same time a series of liquidity pools of coins such as ETH, DAI (also SAI), USDC, REP, SAI, WBTC, ZRX, and BAT.

The objective of this platform is to use the liquidity within these pools to offer loans from the platform, and provide profits in the form of interest and rewards to those who inject liquidity into the protocol. You can even make cryptocurrency exchanges between users of the platform, as if Compound were a stock exchange.