Yield Farming is a very hot money making model in the Crypto community today. It can be an extremely attractive opportunity to make huge profits for users, but there are many things to keep in mind about Yield Farming. So what is Yield farming? Follow our article right below to find the most accurate answer.
What is Yield Farming?
What is Yield Farming? Yield Farming (yield mining) is known as a way for people to generate passive income by providing liquidity. That means sending crypto to Defi liquidity pools or staking pools.
That is, users will lock their funds into a DeFi application, which the project will then automatically pay the “productive farmers” with virtual currency rewards over time.
This Yield Farming model is similar to when you deposit money in the bank, you will receive a monthly interest. That’s why you can now deposit crypto through lending platforms and get interested in crypto.
This reward usually pays out in the form of governance tokens that DeFi projects use as a tool, it’s like equity to facilitate community management. Sometimes it’s the transaction fees that all liquidity providers (LPs) earn on decentralized exchanges like Sushi and Curve.
A brief history of the Yield Farming model
On-chain synthetic asset protocol Synthetix pioneered Yield Farming in July 2019, when it started rewarding SNX governance tokens to the liquidity provider (LP) sETH/ETH of projects on Uniswap V1.
A year later, lending protocol Compound Finance also launched its Yield Farming program with a focus on the COMP governance token. The program is still ongoing, awarding COMP tokens to Compound borrowers and lenders commensurate with the activity levels of these users.
Compound’s implementation of Yield Farming COMPs has partly catalyzed an increase in interest in liquidity (LP) mining, with this interest having grown since these types of passive income opportunities started popping up regularly all over DeFi. So Yield Farming is being the main vehicle for emerging DeFi projects to launch their projects with liquidity.
How does the Yield Farming model work specifically?
Yield Farming is closely related to the Automated Market Maker (AMM) model. Popular AMM models include Uniswap, Mooniswap, Balancer, etc.
In Yield Farming, Liquidity Providers (abbreviated: as LPs) provide liquidity to the protocol’s liquidity pools. A liquidity pool is simply a smart contract that contains money in it. These pools allow users to borrow, lend, or trade between tokens.
In addition, the revenue generated by the Liquidity Pool is the transaction fee when the end user performs activities in the pool. These include activities such as borrowing, lending, and exchanging tokens. This revenue will be divided back to the LP according to the percentage of liquidity they have provided in the pool.
In addition to fee revenue, some protocols also implement liquidity bootstrapping for the protocol, by distributing native tokens to LPs that have provided liquidity to their protocol (either across the protocol pool or a single one). specified pool number). This is called Liquidity Mining.
What types of Yield farming are there?
There are two main types of Yield Farming: Yield Farm and Stake Farm. Essentially, both of these farming coins require users to deposit cryptocurrencies into smart contracts. The differentiating factor is the type of smart contract involved.
1. Yield Farm LP
In Yield Farm LP, users deposit virtual currency into a smart contract. This will facilitate the liquidity pool more programmatically.
Such a pool would act like a decentralized trading pair between two or sometimes more cryptocurrencies. This transaction is done using cryptocurrency provided by LPs.
These LP tokens are extremely important. Because DeFi applications will run liquidity miners that set up a staking interface to deposit these LP tokens.
This will lock in your liquidity and continuously automatically earn you admin token rewards, as long as your LP tokens are staked.
2. Staking Farm
In Staking Farm, when users deposit virtual money into a programmed smart contract staking pool. Instead of being a decentralized currency pair as above, the staking pool is more like a vault for just one asset class. It not only facilitates transactions but also receives deposits.
These Farms provide an easier experience for everyone than Farm LPs. That’s because staking farms only require users to deposit a single asset to earn passive income, as opposed to serving as an LP on the DEX.
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