Today we are talking about Yield Farming and in particular about Cream (but the speech is similar to Yearn Finance).
Cream is a fork of Compound that allows you to borrow your coins to earn interest. This is a Yield Farming platform where Ether is also present (17% per annum for a simple lending).
The most interesting function is that of pools: Yield Farming. This is a highly speculative feature.
How does it work? We provide liquidity to a pool:
In short, we stake our tokens within the pool. We provide liquidity to those who need loans in our pool and then earn an annuity (interest) from the borrower.
Not only that ... we are also given a token that testifies to our possession of a share of the pool. The name of the token received (reward) changes according to the pool (Balancer, Uniswap, etc). If we go and stake these tokens on Cream (or Yearn Finance) we will earn Cream (or YFI for Yearn Finance).
It is clear that these are very risky operations because we are providing liquidity on multiple platforms, however the annual returns are enormously higher (even 800%).
Cream's internal pool is Cream Swap.
I give another example: I put Ether as liquidity in the Cream pool and I will receive the native token of the platform. I can go and put this token on Yearn Finance by receiving another native token of the platform used (YFI). I will put this new token on the Curve platform and so on.
Hypothetically I block Ether to take Dai, these Dai I go to put in some pool and maybe I sell them for more Ether, taking more Dai and so on (enormously increasing the liquidation risks).
All this complex mechanism will generate an exorbitant passive income.
What are the risks? Definitely the liquidation risk and then the reliability of the new platforms. Another problem could be the lack of liquidity.