Yield Farming: Everything You Need To Know
As a result of the unpredictability and volatility of the Crypto market, for a long time, investors had searched for better alternatives to investing in Cryptocurrency. Many investors are now tired of the conventional way of making a profit in Cryptocurrency; where you buy the coin and hold it for a long time and pray it rises one day. The recent dip taught everyone that it is possible to buy the dip and still record huge losses. However, Yield farming brought a new way to make passive money in Cryptocurrency. Our focus in this article will be yield farming, its risks and rewards, and how to go about it.
So let’s get started.
What Is Yield Farming?
Just as we earn interest on the money we keep in the bank, yield farming also helps us make a commission on our crypto holdings. Simply put, yield farming entails lending or staking your coins or tokens in exchange for very high fees or interest in the form of transaction fees. It is akin to earning interest on a bank account; theoretically, you are lending money through a decentralized app. Investors also get access to the loans through the decentralized exchange.
Although, yield farming is riskier and more complex than saving money in the banks. It is one of the critical drivers of decentralized finance (defi). According to Coinmarketcap.com, in 2020, after going mainstream, its market capital increased dramatically from $500 million to $10 billion. Initially, at the early stage of yield farming, you could use stable coins.
Before delving into investing, you must know the difference between yield farming and liquidity and understand the technicalities surrounding investing.
The Risks of Yield Farming
Yield farming is highly profitable, but it comes with a level of risk. Any investment with high turnover has risks, and yield farming is not an exception. The risk that comes with yield farming include
Gas fees
When there’s a high surge of investors in yield farming, gas fees increase, it happened in 2020 when gas fees increased, which made many investors withdraw their funds. The gas fees for transactions processed in Ethereum are considerably high. It poses a significant problem to those with low funds as they will want to withdraw, as their chances of getting colossal turnover are slim. In the long run, they might end up losing their funds. High gas fees favour only affluent investors.
Scams
Cybercrime is increasing, and yield farming is prone to manipulation from hackers. You must ensure that you are using a trusted app because anybody with the skill can make one. So, before you jump into investing, you have to vet through reviews online and research. Asides from this, you could be a victim of a rug pull scam. It is a viral scam where developers siphon investors. According to lexology.com, $3 billion was lost in rug pulls in 2021.
Price
The crypto market is volatile and subject to price changes. Yield farming has required Cryptocurrency for a long time. So, if the coin’s value drops, it means you made a loss.
Impermanent loss
Assume the worth of ETH tumbles to 1000 USDC. The coins in the whole liquidity pool shift to compensate for that. Whenever you have a colossal loss in any of the coins in the pool in such circumstances, you can wind up with a momentary loss where you get lower esteem than what you put in when you pull out your liquidity. The benefit from cultivating yields on your digital money resources sometimes compensates for the loss. However, it doesn’t continuously. Given the instability of digital currencies, the impermanent loss can happen any time the worth of cryptographic money drops. Notwithstanding, it possibly occurs when the value drops a great deal.
Bugs
Bugs appear in every app, even if the developer tries their best to avoid them. However, their effect is minimal, although hackers can take advantage of the presence of bugs and cause investors to lose all funds.
Strategy
You should develop a good strategy as your profitability depends on it. You have to make the right choice of pair you will use and stay updated with all the latest Cryptocurrency. You will need to know when to pool out from a trading pair and re-invest in another.
Knowing the risk involved in farm yielding, why should you still invest in it?
Rewards in Yield Farming
The greater the risk, the higher the rewards. You can double your profit, but it depends on your strategy.
Percentage Rate (APR) can be as high as 20% though you can still make a loss at the same rate due to the market’s volatility. But you might be less affected if you make use of stable coins.
How to Invest in Yield Farming
Just like purchasing Cryptocurrency, Investing in yield farming is not that difficult.
Here is how to go about it:
Firstly, find a platform you would like to yield your farm on
Locate the page where different pools are listed and make your choice.
Link your wallet and add as many coins needed, then click on deposit
Approve transactions from your wallet. The gas fees will pop up. If you are okay with it, click it on to confirm
Lastly, add liquidity to the liquidity pool you want to invest in, and approve the transaction immediately.
Yield Farming is better for putting your coins to work while they appreciate, instead of leaving them to lie fallow. For those enthusiastic about yield farming, it is essential to use trusted platforms like Uniswap and Pancakeswap. You can check the top platforms for investing in yield farming here. As Cryptocurrency becomes much more popular, yield farming will become more mainstream. The idea is not entirely new but a digitized and more convenient upgrade of traditional banking systems. Though yield farming can give you a high Return On Investment (ROI), it is still important you understand it correctly and come up with an excellent strategy because the risk of loss is as high as its profit.
