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What is Yield Farming? DeFi Terms Simply Explained 2021

What is Yield Farming? DeFi Terms Explained

This article will go over the term yield farming – explaining the definition and answering all frequently asked questions in the DeFi community.

Yield farming is a phenomenon that has been drawing the interest of people around the world. For those who don’t know, yield farming is a method in which money is made by trading on a cryptocurrency exchange.  But not only that. 

Yield is all about crypto and it works like it.

As you know, cryptocurrency is a medium of exchange created and stored electronically in decentralized databases called blockchains. This currency relies on cryptography to verify transactions, instead of a central bank or government backing the money.

Cryptocurrency uses distributed ledger technology, or blockchain technology, to form a decentralized network that records information on millions of devices across the globe. The blockchain technology stores all transactions made with the cryptocurrency, and these transactions are made available publicly for anyone to see.

What is Yield?

Yield in crypto is a measure of the amount of revenue a trader can recoup on an investment over time. It’s calculated by dividing the price per coin by the annual return, which is typically offered to investors. Low yield equates to a long-term profit and high yield equates to short-term profit.

What is Yield Farming?

Do you know what Yield Farming is? Yield farming was born out of the need to make money with cryptocurrency.
 
The idea is simple:
 
Cryptocurrency prices tend to fluctuate. If you notice a steep increase in price, you can purchase a large amount of coins at that lower price and sell it for a higher price. The process of trading by staking or lending crypto is what yield farmers refer to as yield farming.
 

Yield Farming is possible thanks to DeFi protocols –  allowing Peer-to-Peer Deferred Deposit. 



How do you earn crypto with Yield Farming?

How do you earn yield farming? Well, you earn interest by lending crypto.

DeFi protocols allow a sender of a transaction to pledge the funds they wish to receive. 

You earn crypto thanks to Ethereum technology and its “ERC-20 tokens”.

Yield farming, also known as transparent crypto lending arbitrage, is a term that was not part of mainstream knowledge until recently. The idea behind yield farming is simple — it involves trading cryptocurrency for something that may increase in value long-term such as utility tokens or anything else related to crypto.

The reasoning behind the investment can be either based on the YOLO principle or technical analysis of the asset’s short-term price changes.

How does Yield Farming work?

  1. You buy crypto
  2. You want to increase crypto’s price
  3. You start lending crypto thanks to Ethereum tehcnology
  4. You choose a  DeFi protocol
  5. You “lock” your crypto thanks to “smart contracts”
  6. After some time, you may start earning good because the price of the crypto has increased

When did Yield Farming start? Why do you use Yield Farming?

Yield Farming first started once liquidity mining got popular.
 
It’s worth mentioning that yield farming isn’t the only way to earn money with cryptocurrencies. Some traders follow a strategy called buy-and-hold where they sit on their wallets until the price of cryptocurrencies increase. In the meantime, they keep their coins in a wallet and earn from the staking rewards credited to them. You can say that isn’t yield farming because staking rewards are just a small amount, compared to the big profits you get from trading.
 
It’s almost like a forex trading strategy except in this case you’re trading on cryptocurrencies instead of government backed currencies like the dollar or euro.



How to Yield Farm? Step by step Guide on yield farming on Binance

Note: It’s risky. It’s not for beginners. Market prices change like crazy, you can lose money! 

What is Yield Farming? How to start Yield Farming? Liquid Swap

In order to start yield farming, you have to start providing liquidity by transferring your crypto into a liquidity pool and lend this crypto on a decentralized non-custodial money market protocol. Here is a step by step guide on how to start yield farming and become a liquidity provider:

  1. Register for a Binance account
  2. Buy crypto
  3. Select a pool
  4. Select the desired crypto amount to add to the pool
  5. Trade 
  6. Eventually, you can earn high yields from transaction fees, flexible interest and liquidity rewards by providing liquidity Start providing liquidity by transferring your crypto into a liquidity pool

 

Yield: What is it? How to yiled farming? Guide step by step binance

 

Congrats! You now have added assets to the Binance asset pool and are now a liquidity provider on Binance! You can now start earning transaction fees of other users who are buying from the pool

What are Yield Farmers?

Yield farmers are, simply put, people who invest in the crypto market in order to harvest yield. Yield can be thought of as profit gained from an investment.

How is Yield calculated?

Yield is calculated by:

Yield = Interest Rate / Invested amount 

or

Yield= Interest Rate / Current Price of the Investment

 

The higher are people willing people to pay you for your crypto now, the bigger yield, the better yield farming strategy you’ve followed.



What are the benefits of Yield Farming in Crypto?

Crypto yield farming has a few main advantages when compared to other forms of trading. It has high volatility and high risk & higher return associated with it.
 
Yield farming is useful for traders that are already experienced with the market, and feel comfortable speculating on price changes without any prior research.
 
The ability to trade using leverage is another advantage — this lowers the barrier to entry for less experienced traders. 

DeFi Protocols & Yield Farming Protocols

Here are some DeFi protocols & Yield Farming protocols:

  • Aave
  • Compound
  • dYdX
  • MakerDAO

Notice: Egorithms is not a financial advisor, provider, or expert. We are a fun media just trying to provide you information. We are not advising you on investing, because we are no experts, either. We will just tell you about the opportunity. Investing is risky. Don’t be stupid.

Thank you for reading our article on yield farming and we hope that we have answered your questions on what is yield, yield farming.

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