You must have heard of people earning rewards over their existing crypto assets and maximizing their profits via some decentralized finance protocols. This process is called yield farming and the very famous Comp token was the first to introduce such a yield farming protocol for users. It is because of this reason that the value of assets locked in smart contracts on DeFi platforms which were $670 Million shot up to $13 Billion in 2020. Let’s look at the process of yield farming a little closer and see how investors can make money via yield farming.
What is Yield Farming?
Yield farming refers to the process of locking cryptocurrencies in a liquidity pool to earn yields on the provided assets. The yield is obtained in the form of native tokens and APY rewards. The investors then use the earned cryptocurrencies to gain another round of yield on them. So, yield farming is basically the process of locking in your cryptocurrencies to gain more cryptocurrencies, that is, the highest yield.
Yield farming became so popular in the decentralized finance protocols because it provided investors a way to earn passive income from their crypto assets which are otherwise going to waste in the crypto exchanges and wallets. So, yield farming makes use of those idle cryptocurrencies to provide liquidity in the DeFi protocol.
How Does Yield Farming Work?
Here’s how the entire process of yield farming works, right from the beginning of liquidity providing till earning rewards on the provided liquidity.
1. Providing Liquidity
This is the first step of yield farming wherein liquidity providers deposit their money in the liquidity pools. The coins in the liquidity pool are locked by smart contracts which execute themselves only under certain restrictions. The coins are mostly stablecoins that offer stable prices and are backed by some tangible assets.
2. Choose What to Do
The liquidity providers then choose whether they would like to lend the yield farming coins, trade them or buy them from the platform. Depending upon the operation they choose to perform, they have to pay a fee following which they get a return on their investment.
3. Obtain Rewards
The liquidity providers are then rewarded for their willingness to lend money in the liquidity pool. The rewards that they obtain are based on the amount of cash deposited by them. In addition to this, the rewards vary with the platforms as well.
4. Farm the Rewards Again
The liquidity providers then lend their rewards yet again to earn the next set of rewards and to increase the capital of their investments. The users keep storing their rewards in the liquidity pools until they receive a variety of rewards and maximum profits on their investments.
How to Make Money via Yield Farming?
The process of making money via yield farming can be easily broken down into four steps. These are explained in detail below.
1. Choose the Platform
Select the yield farming platform that you would like to use to farm yields. You will see the various liquidity pools listed on the platform along with the yield percentage for each of the pools. All the pools will have different coins supplied by the platform. This should be a deciding factor for the pool you are going to choose.
2. Connect Your Crypto Wallet
As yield farming involves depositing your crypto coins, you will connect your crypto wallet to the platform that you have chosen. Select the number of coins that you would like to deposit and click the Deposit button.
3. Approve the Transaction
Next, you will need to approve the transaction from your crypto wallet. In the transaction request, you can also see the gas fees associated with the yield farming transaction. Confirm the transaction.
4. Provide Liquidity
After choosing the liquidity pool where you would like to deposit your coins, confirm your transaction on the yield farming platform. The process may seem a bit different on different platforms as all of them have their unique user interface.
Types of ROIs Earned by Investors: Make Money via Yield Farming
Now you may be wondering the kind of rewards that the liquidity providers earn from yield farming. Here are the three main types of rewards that can be earned via yield farming through various platforms.
Depending upon the yield farming platform that you have chosen, you can earn native tokens of the protocol and use them for trading over several decentralized exchanges. These native tokens are transferred to the user over a period of time, varying from a week to a year.
Revenues on the Transaction Fee
There is a commission proposed during the development of the pool by the yield farming protocols. Different pools may have different commission fees ranging from 0.02% to 15%. These commissions are earned by the market makers of that pool.
Increase in the Capital
The increase in the funds helps to calculate the revenue generations from that pool. But when coins like bitcoins get involved in the pool, the market gets volatile and it is hard to predict a correlation. Therefore, your capital increases with yield farming and helps you identify your scope of revenue.
Platforms to Do Yield Farming
Since the beginning of the yield farming process by Compound and Aave, there are numerous other platforms that have emerged in this ecosystem. If you choose just another platform to farm the yields, there is a strong likelihood of you losing money. Therefore, here are the top 5 yield farming protocols that you should begin with.
Compound Finance: Make Money via Yield Farming
It is one of the most preferred yield farming platforms in the world. You need to connect an Ethereum Wallet with this platform to borrow or lend tokens. It automatically regulates the rates of the yield farming tokens based on the demand and supply.
This platform has its own tokens known as aTokens that serve as rewards for the liquidity providers. It regulates the interest rates automatically depending upon the market situation. aTokens help people earn rewards quickly and generate compound interest. This platform has been very popular because of its extra functionalities like flash loans.
Uniswap: Make Money via Yield Farming
This platform is based on the swapping of precarious coins which means that the liquidity providers have to deposit an equal value of two types of coins in order to create a market. So, these pool transactions allow users to earn fees.
It is basically a decentralized exchange that was founded in 2020. PancakeSwap contains different yield farms and you need to lock in two types of coins to get LP tokens from that farm. You can then earn Cake tokens with the LP tokens that you earned.
It is another decentralized exchange wherein crypto trading is governed by the Automated Market Maker model. SushiSwap gives SushiSwap Liquidity Pool tokens to the liquidity providers in addition to other incentives like swapping, staking, etc.
Conclusion: How to Make Money via Yield farming?
Yield farming is an exciting way of earning maximum returns from your crypto assets. If you are thinking of trying your hand at the process, it is definitely worth trying any of the platforms mentioned above. Also, make sure that you do your due research while weighing the pros and cons of each and finding what works best for you.