Yield Farming is currently one of the hottest topics in decentralized finance (DeFi). This effective means of maximizing returns on crypto holdings via various DeFi protocols is generating a lot of hype in the digital assets universe.
Currently, yield farmers utilize ERC20 tokens on the Ethereum blockchain to earn returns. However, yield farming on other top blockchains could soon be possible, giving crypto holders diverse options to stake and lock their digital asset holdings in return for lucrative rewards.
Smart contracts facilitate users to interact with various DeFi protocols. More investors are flocking into emerging yield farming projects such as Yearn Finance in the hope of getting a share of the returns on offer.
In turn, these liquidity providers (LPs) create increased demand that pushes up the value of the locked tokens and DeFi platforms.
Per the latest data from DeFi pulse, there is $32.8 B in crypto assets currently locked in DeFi applications.
The Future of Farming Is Digital
The mechanism of yield farming primarily depends on the terms and features of each DeFi app. Most protocols allow users to earn a share of transaction fees for locking liquidity in a particular DeFi platform such as Uniswap or Balancer.
The practice of yield farming gained traction in June of 2020, when Compound revealed that it would start issuing COMP, its native governance token, to borrowers and lenders on the platform.
Demand for the COMP token shot up, heightened by the platform’s automated distribution structure. Since then, the yield farming craze exploded, catapulting Compound into the leading position in the DeFi sector.
Many more yield farming platforms have since come up offering investors innovative techniques to temporarily lock crypto in liquidity pools and generate high rates of return, including bonuses and incentives.
Yield farming takes the concept of locking crypto assets in a DeFi app and compounds returns by applying leverage to give users increased exposure to various digital tokens. These crypto holdings are collateralized with USD-backed stablecoins.
There are various strategies that yield farmers can tap into DeFi protocols to multiply their crypto holdings, including Leverage, High Risk & High Returns.
However, liquidity mining is one of the most used techniques, where lenders provide their own crypto assets into lending pools to maintain liquidity. For their role in facilitating these pools’ working mechanism, LPs are rewarded with tokens.
Synthetix was the first DeFi protocol to roll out liquidity mining for crypto investors. The strategy has now blossomed into one of the most effective means for yield farmers to earn interest and incentives on their crypto holdings.
Yield farming has defied critics who dubbed the technique a lucrative bubble in the world of decentralized finance when it first became popular in 2020. To this day, the practice continues to be a beneficial investment strategy that keeps gaining more attention from many money-hungry investors.