What is Yield Farming? Recently, Bitcointech has received many questions from investors about this term. As the form of making electronic money becomes more and more abundant, traders also have many ways to increase investment profits. And YF is one of those ways. So what exactly is this form of YF liquidity mining and how important is it in DeFi. Let’s find the answer right here!
Definition of Yield Farming
Yield Farming(YF) is also known as Liquidity mining. This is how to generate rewards when investors hold cryptocurrency. By providing liquidity for Defi protocols, investors can profit from their assets. Simpler, YF is the user putting money into a pool to receive interest.
There are quite a few people who confuse liquidity mining and Staking. They are basically the same, but not completely. Liquidity mining interacts with liquidity providers. At the same time, YF provides liquidity into the protocol’s liquidity pool.
How YF work?
Mentioning YF is referring to a market maker AMM (Automated Market Maker). Yield Farming and AMM are closely related. From liquidity mining, Liquidity Providers provide liquidity into the protocol’s liquidity pool.
LP (Liquidity Pool) is a smart contract that includes a token (or coin). LP will receive the rewards as a token (or coin) from transaction fees of the underlying DeFi platform or any other source. This bonus is calculated based on the provided liquidity percentage pool. In addition, revenue is calculated by distributing tokens into the liquidity LP protocol (known as Liquidity Mining). Simply, besides collecting money when providing liquidity LP also will receive another amount of new tokens.
The most prominent platforms of YF
Here are some most prominent liquidity mining platforms:
- Maker DAO: use Maker mint DAI coin, next use DAI itself for farming in other protocols.
- Compoud: liquidity is provided in Compoud to farm COMP, profits from borrowing and lending activities.
- Balancer: farm BAL, the tokens managed on the Balancer.
- Uniswap: collecting transaction fees from providing liquidity to the liquidity pool.
- Aavee: loan platform, fast loan, liquidity mining on many platforms
- Synthetix: use USD to provide liquidity mining into Liquidity pools
- Curve Finance: providing liquidity, fees, profits and CRV
- Earn Finance: providing liquidity, fee and farm YFI.
The role of Yield Farming in DeFi
First, let’s learn with Bitcointech what the basic concept of DeFi is? The full name of DeFi is Decentralized Finance. The platform of DeFi is designed to help users use money freely, without intermediaries, without KYC. With DeFi, all users need only a wallet address ERC20. DeFi is composed of 3 main parts which are: Assets Lending, Yield/ Liquidity Farming and DEX.
Yield has a great influence on DeFi. The birth of YF has created extremely fast development momentum for the decentralized financial platform. Resulting in a series of similar projects attracting liquidity and protocols. DeFi is getting more attention. The liquidity is transferred from one protocol to another, leading to a sharp increase in token price making capital inefficient. That capital is transferred to DeFi for farming and profit.
Not to mention the continuous release of new projects and new distribution methods by DeFi. These projects are based on an existing protocol that helps traders get profit.
Some risks of liquidity mining
No one can deny the liquidity benefit YF brings. However, investors need to really understand how the protocol works. Otherwise, investors will be at risk when using the protocol of YF.
- Most protocols are developed with small teams, with little capital. Therefore, the possibility of bugs in smart contracts is quite high. It still happens that audited protocols are still stolen like Bzrx, curve…
- When asset values experience rapid fluctuations, providing liquidity easily causes LPs to lose. Even LPs can lose all their assets.
- Collateral can be liquidated when the market fluctuates
- The introduction of liquidity from YF entails the risk of bubbles appearing in DeFi.
Necessary notes when exploiting liquidity
Jesse Walden (partner of a 16z) talk: DeFi protocols need to depend on the users and founders.
Profit hacking in DeFi is a short-term driver for user growth. The bigger game is to create long-term wealth by building(used to), part of products and services that billions of people will use every day.
YF is a new step that opens a new era for DeFi. Liquidity Farming is seen as a smarter way to attract short-term investors than long-term.
The form of liquidity mining can influence other protocols for profit. However, this is also affected when productivity decreases, especially on the platform same as Earn, bootstrapping for Earn, Curve and Balancer.
What is Yield Farm and how important is its role? Here sure you have got the answer. The short profit and YF bring is quite attractive, which may be the reason why many investors are interested. However, you also need to research carefully before deciding whether to invest or not. Hope in the near future Liquidity Farming will grow more and more and meet the profit needs of investors.
Bitcointech will continue to continuously update articlé related to account mining and the DeFi platform. Traders don’t miss the opportunity to access new knowledge and investment experiences.