What is yield farming?
Yield farming is a way to make money by holding cryptocurrency holdings. In summary, it means blocking cryptocurrencies for rewards.
But is it the same as staking?
In a sense, yield farming can be compared to staking as both strategies allow you to earn cryptocurrencies by simply owning it, but nevertheless, yield farming is a little more complex and risky. It works with the involvement of users called liquidity providers (LPs) who add funds into liquidity pools which are smart contracts that hold the funds. In exchange for providing liquidity to the pool, LPs receive a reward. Reward which can come from commissions generated by the underlying DeFi platform or some other source.
Some liquidity pools pay their rewards in multiple tokens, very often their own tokens which in turn, by implementing incredibly complex strategies, can be deposited in other liquidity pools to earn additional rewards
Yield farming is typically done using ERC-20 tokens on Ethereum, and rewards are usually an ERC-20 token type as well, but has also recently developed on the BEP 20 protocol on Binance Smart Chain (BSC).
But is Yield farming risky?
As already said, yield agriculture is not simple. Agricultural production strategies are very complex and therefore only for expert users. In addition, crop farming, especially on ERC 20 protocol due to high gas fees, is more suitable for those with a lot of capital.
An obvious risk of agricultural production is smart contracts. Due to the nature of DeFi, many protocols are at risk of smart contract bugs.
Even in the case of larger protocols that are audited by reputable auditing firms, vulnerabilities and bugs are continuously discovered and this can lead to the loss of users' funds. You need to take this into account when locking funds in a smart contract.
What are the platforms and protocols for yield farming?
On the ERC-20 protocol we find: Compound, Finance, MakerDAO, Synthetix, Aave, Uniswap, Curve Finance, Balancer, Yearn.finance and SushiSwap
On BEP20 protocol: PancakeSwap, Venus, Kava, Beefy ...
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Disclaimer: This article reflects its author’s opinion only and is not financial advice. We take no responsibility for the results of any trader’s decision or action.