Yield Farming 101: High Risk, High Reward
Spiderman is known for the saying, “with greater power, comes greater responsibility”. And indeed, responsibility comes with risk. In the age of cryptocurrency, yield farming is one of them.
Yield farming is one of the newest concepts to emerge from the decentralized finance (DeFi) movement. Using an authorization-free liquidity mechanism is a novel way to get rewarded with cryptocurrency holdings. It uses a decentralized “lego money” ecosystem built on top of Ethereum to allow anyone to generate passive income. As a result, yield farming may influence the future behavior of HODL investors. Why keep your resources idle when you can put them to good use?
Yield farming is a cryptocurrency investing strategy that aims to produce higher returns than traditional investments currently offer. It could be a chance for the brave to gain big or for holders of recent currencies to control prices. The US Securities and Exchange Commission (SEC) has issued a warning to the company, expressing concerns about whether the exercise should be regulated as a form of securities distribution.
What is Yield Farming, then?
When you deposit money in a bank, you are effectively making a loan on which you receive interest. Yield farming, also known as yield or liquidity harvesting, involves the lending of cryptocurrencies. In return, you will receive interest and sometimes fees, but these are less important than the practice of supplementing the interest with the delivery of units of a new cryptocurrency. The real payoff comes every few seconds on top of the liquidity you provide. Coinswap Space is an example of DeFi — a perfect ecosystem for automated liquidity that is provisioned in the Binance Smart Chain.
How Does it Work?
Do you already know what a DAPP is? This is short for a decentralized application. Ethereum co-founder Vitalik Buterin explains the idea with this analogy: If Bitcoin is a pocket calculator, systems with DAPP are smartphones, but where computer applications run without a strictly functioning machine or server. Many of them use the Ethereum blockchain, a virtual ledger.
The funds deposited are usually stable coins pegged to the USD currency, but this is not a general requirement. Some of the most common stable coins used in DeFi are USDT, BUSD, USDC, DAI, etc. Some protocols mint tokens that represent their coins stored in the system. For example, if you deposit DAI in the compound, you will receive cDAI or DAI compound. When you deposit ETH in the compound, you will receive cETH.
Platforms and Protocols
What are the methods for obtaining these yield farming rewards? There isn’t a quick and easy way to perform high-yield farming, to be sure. Yield farming techniques can be marketed for more than half an hour. Each platform and method may have its own set of rules and potential dangers. If you want to start yield farming, you should first learn about decentralized liquidity protocols.
The core concept has already been grasped. You put your money into a sophisticated settlement and get paid in return. However, there is a wide range of implementations. As a result, blindly depositing your hard-earned money with the expectation of high returns is no longer a good idea. You want to stay on top of things with your investment as a fundamental rule of risk management. The following is a list of some of the extant yield farming protocols:
- Synthetix — a protocol of synthetic assets. It allows anyone to bet Synthetix Network Token (SNX) or ETH as security and create synthetic assets against it. Synthetix may allow the use of all types of assets for productive agriculture in the future. Cheap for long-term bags of gold.
- Uniswap — a decentralized exchange (DEX) protocol that enables reliable token exchanges. Traders can then trade with this liquidity pool. In exchange for providing liquidity, liquidity providers obtain commissions for the operations carried out in their group. Coinswap Space is a perfect example of DEX uses an automated market maker (AMM) model where users can trade against a liquidity pool. It’s listed as the 6th displaying equal opportunity launch and fiat on-ramp to non-custodial wallets.
- MakerDAO — this is a decentralized lending platform that supports the creation of DAI, a stablecoin that is algorithmically linked to the value of the USD. You can generate DAI as a debt against this collateral that you have secured. This debt accrues interest over time, which is known as the stability fee.
- Curve Finance — a decentralized exchange protocol specially designed for efficient stablecoin exchanges. It enables users to trade high-quality stable coins with relatively little slippage.
- Compound Finance — an algorithmic money market that allows users to lend and borrow assets. Anyone with an Ethereum wallet can add assets to the compound’s liquidity pool and earn rewards that start piling up right away.
- Balancer — this is almost the same as Curve or Uniswap. But it permits customization of token allocations by creating balancer pools instead of the 50/50 being offered by Uniswap.
The Risks You Have to Take
In addition to the official raids, there are robberies on the one hand. The digital money you lend is in the hands of software, and hackers always seem to be able to exploit vulnerabilities in the code and make money. Also, some coins that people deposit for yield farming are no more than a few years old and could lose their value and collapse the entire system. Also, early investors often have large stakes in reward tokens, and their selling steps could have a big impact on token prices. Finally, regulators have yet to comment on whether the reward tokens are or could become value decisions that could have a major impact on the use and value of the coins.
When someone has lent a cryptocurrency through a DeFi service like Compound and then borrows it again, it creates an artificial demand for the coins and thus inflates the prices of the coins. This has raised concerns that early adopters who have accumulated large stocks, often referred to as whales are manipulating price movements — a common accusation in various crypto markets. Small traders should be aware that harvesting crops “has become a game for whales to appropriate the vast majority of rewards,” as stressed out by a crypto research firm named Messari.
Are You Ready?
Amid the Covid19 pandemic, all cryptocurrencies, which are generally considered long-term uncorrelated assets, have seen a surge in interest given the high volatility of many traditional assets. Additionally, many of the yield farming products only hit the market early this year which offers very attractive tokens as rewards. They also feature high-profile supporters such as Polychain and Horowitz.
The question is, are you ready to take the risk and reap the huge harvest? Check out Coinswap Space to start your crypto journey now and join the revolution!