What Is Yield Farming Explained
What is Yield farming? It is where people stake or lend crypto assets into a liquidity pool in order to generate interest or profit in the form of additional cryptocurrency. Yield farming can be risky, but it’s an incredible development within decentralized finance (DeFi).
Yield farming has become a major investment strategy in DeFi. The cryptocurrency coins or tokens you earn are from the transaction fees or interest. This is very similar to earning interest from a bank, where you are simply lending money to the bank.
Lets just say, the banks are not very happy about cryptocurrency and even less happy about yield farming 🙂
Currently, yield farming is the biggest growth area of the still very young DeFi sector, which currently, as I write this blog, has a market cap of over $134 billion!!
The video above explains this brilliantly, but basically yield farming protocols work by incentivizing liquidity providers (LP) to stake or lock up their cryptocurrencies in a smart contract-based liquidity pool.
People get into liquidity pools early to maximise profit, because as more people add funds to the particular liquidity pool, the profits going to the liquidity providers (LP) decreases.
Yield farming is a fantastic way to make passive income but be very careful, it is high returns, but is also risky. Do your research and only invest with capital you can afford to lose, as DeFi currently is like the Wild West!