What Is Yield Farming? A Brief Guide

Yield farming rewards can range from 1% to 1,000% APY. However, with high reward comes high risk! 

What is yield farming? Lucky for you, we put together this guide to help you be more informed!

Keep reading to learn more.

What Is Yield Farming?

Yield farming is a process where yield farmers use a centralized finance platform (DeFi platform) to earn cryptocurrency in return for their service.  

They can accomplish this if they borrow crypto, or by lending crypto themselves.

How Does It Work?

Investors can put coins or tokens into a decentralized application (dApp). Yield farmers then lend, borrow, or stake the coins or tokens to earn interest and speculate on price swings. 

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Typically, yield farmers use a decentralized exchange (DEX) to accomplish this. The more complex tactics increase yield output.

For example, gains can be optimized by constantly shifting cryptos between platforms.

Yield Farming Options

Liquidity Provider

DEX users deposit two coins to provide trading liquidity. The exchanges then charge a fee to swap the coins. This fee is paid to liquidity providers.

Lending

Coins or tokens holders lend to borrowers and charge interest on the loan. The lenders then earn yield from the interest paid on the loan.

Borrowing

Using a token as collateral, farmers then loan another token. The user then can farm yield with the borrowed coins. 

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Staking

There are two ways this is done. The main form is on proof-of-stake blockchains, where the user is paid interest to pledge tokens to the network to provide security. The second form is through staking LP tokens earned from supplying a DEX with liquidity.

How to Get Started Yield Farming

The first thing you will need is a DeFi platform to access tools for yield farming. The next step is to determine the coins you will want to use.

Check the prices of various coins to determine which fits your needs best. Here are some options with different price points to look into:

How Safe is Yield Farming?

Yield farming is high-risk and high-reward. Some of the risks include: 

  • Volatility
  • Fraud
  • Rug pulls
  • Smart contract risk
  • Impermanent loss
  • Regulatory risk
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Most of the risks can be mitigated by doing your research, using a reputable platform, and only investing a small amount of money at a time. 

The more information you have, the better able you are to make smart investment decisions. With a little research and some smart decisions, you can significantly increase your yield!

Yield Farming Crypto: Get in While You Can

What is yield farming? It might be just the right opportunity for you. Just don’t jump in uninformed, you want to keep your risk down.

There is an element of yield farming that where the more people know about it, the less effective it becomes. If you think it might be a good option for you, now is the time to get started!

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