Welcome to another lesson from the Crypto Classroom What is Yield Farming? It’s probably one of the hottest buzzwords in the crypto industry today. Before you start, it is important to note that Yield farming is extremely high risk due to the experimental nature of the Ethereum network with many unknown vulnerabilities. Do not stake/farm more than what you can afford to lose. Please also make sure that you have done enough research before attempting Yield Farming. This is also NOT Financial Advice.
So, now let’s talk about what Yield Farming is. Fundamentally it’s a process where you put crypto assets to work in order to generate the highest possible return. At the most basic form, a yield farmer may move tier assets within Compound and just constantly chase whatever pool that offers the best APY (Annual Percentage Yield) from week to week. This would often have risks, but if you are a yield farmer then you must be able to handle risk. There are also many different ways of Yield Farming, but at the most basic level it is just lending out cryptocurrencies in return for interests and fees. We will dive into specific processes later.
So why is Yield Farming so popular of a sudden? The main reason why this topic is gaining SO much popularity recently is due to the high amounts of return that people have been racking up. Some ‘Farmers’ were able to gain returns up to 1000%! But of course that also comes with A LOT of risk, so make sure that you know what you are doing before diving in! The boom of all this can be dated back to this past June 15, when Compound decided to distribute their governance token, COMP.
The demand for the token kicked off a massive craze moving the token into its current leading position in the DeFi space. The popularity of Yield Farming also can’t leave behind the concept of Liquidity Mining. Liquidity Mining occurs when a yield farmer gets a new token (“mining”) and the usual return in exchange for their liquidity. The idea behind all this is to stimulate the usage of the platform which would create a positive usage loop that will help to attract users. Moreover, the stimulated usage would hence drive up the value of the token. Liquidity Mining is one of the reasons why COMP has gained so much popularity and why ‘Farming’ has received so much attention lately.
Let’s start with an example so that we can more easily comprehend the idea!
A yield farmer may put 500,000 USDT into Compound. With that they will get a token back for that stake, called cUSDT. So, let’s just say that they get 500,000 cUSDT back. The formula for Compound is pretty crazy but it is not 1:1, but that doesn’t matter too much.
Later, they can just take the cUSDT and then put it into the liquidity pool that takes cUSDT on balancer. This is a platform that allows users to create/add liquidity to crypto index funds. This is the basic idea of Yield Farming, where users just look to edge out the system and get as much yield as they can across the variety of products that are worked on.
With that you can also add in leverages and earn 4x profits, but of course that also comes with MORE risk. I’m sure that I have cause some confusion amongst quite a few of you, but anyways be sure to do some more research before diving into yield farming!
Check out the tutorial below to learn more about this topic for various other tokens:
Yield Farming is definitely just getting started. The process is still warming up, and it has seen a lot of growth in just the past few months. Many of the companies like yearn.finance have stated that they are currently just testing with the system, so there is still a lot of speculation in the air. However, with COMP, we definitely see that the DeFi world has been altered into a new way of thinking. It has prompted the creation of many other projects working on many of the similar things. Yield farming is definitely something that will be kept to the future and crypto yield farmers will continue to move on fast, looking for new crypto fields of benefits.