Yield farming also referred to as liquidity mining, is a way to generate rewards with cryptocurrency holdings. In simple terms, it means locking up cryptocurrencies and getting rewards.
In many cases, it works with users called liquidity providers (LP) that add funds to liquidity pools. Liquidity pool is a smart contract that contains funds. In return for providing liquidity to the pool, LPs get a reward. That reward may come from fees generated by the underlying Defi platform, or some other source.
Some liquidity pools pay their rewards in multiple tokens. Those reward tokens then may be deposited to other liquidity pools to earn rewards there, and so on. You can already see how incredibly complex strategies can emerge quite quickly. But the basic idea is that a liquidity provider deposits funds into a liquidity pool and earns rewards in return.
Staked funds aren’t utilized in any way and tokens are distributed proportionally to what’s staked (may be dai, weth, ycrv, or other tokens).
Token price risk: zero. Token accrues, but even if it falls to zero you lose nothing.
Smart contract/protocol risk: depends on the staking contract, usually low to zero. Contracts are usually a simple modification of the first contract used by yearn (taken from synthetix), making analysis easy by only looking for differences.
Staking gives you both bandwidth and energy. Bandwidth and energy are required when you perform any transaction. Generally if have staked your currency then 0 transaction fees are taken (in TRX).
Tokens are gained in return for providing liquidity for requested tokens on Uniswap, balancer, curve, mooniswap.
Token price risk: medium to high, depends on pool weights.
Current LP is Etherium based Uniswap which just gave $1200 to anyone who had ever used it before September 1st.
TRX base Sun which is constantly generating new Sun token.
The basic way to invest in LP is to buy two tokens of the same base (TRX or ETH ) and pair them in a ratio of 50/50. After pairing them, invest them in the pool which locks up your tokens and mines the proportional amount of tokens.
Yield Farming in a nutshell
Before you buy or convert currencies know that gas price will affect your currency. ETH has through the roof gas price and any small sum investment will be useless and you will end up losing money.
Another important thing to note here is the retracement risk. After you lock up your currency, they will have to maintain the same ratio. Any upward or downward movement of either token would make you lose money.
So the best time to invest in LP is when the currencies are showing a range-bound movement. And generally, LP is done for a longterm period in short-term you hardly gain any tokens.
Depositing and borrowing funds for defi
Currently utilized by compound and cream (a compound clone). Users get rewarded with tokens for lending and borrowing tokens.
Token price risk: zero.
Security risk: the most complex to analyze the option of all, although Compound itself is the safest defi dapp on ethereum.
Most beginners hear about staking, yield farming, rewards & these highs APY (Annual % Yield) & think to themselves “this is all too hard.” In reality, if you take the time to learn how to send tokens from one address to another, you’re 90% of the way there!
A word of Caution
The magical world of yield farming. From $4k to $1 in under 5 minutes.
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