What is Yield Farming?
If you have been exploring DeFi or actively researching the subject, you might have come across “yield farming”.
But then, what exactly is Yield Farming, and why is it so popular in decentralized finance (DeFi)?
Before we dive in, we have to understand where it all began—DeFi.
DeFi is an umbrella term to describe solutions that port traditional finance to the blockchain, eliminating the middleman. The emerging sector is smart contract-reliant, open, and global, riding on popular public blockchains like Ethereum, BNB Chain, Cardano, etc.
Figures reveal that there are more than $212 billion of different digital assets under management in various DeFi protocols like Maker DAO, Uniswap, CREAM Finance, and more.
DeFi thrives because its protocols are trustless and incentivizing, encouraging community participation.
The incentivization part of DeFi explains why Yield Farming, or liquidity mining, has become a permanent fixture and sometimes highly lucrative.Yield Farming is when one earns more crypto from one's cryptocurrency by interacting with one or more DeFi protocols. Learn more here: Click To Tweet
Yield Farming is a way of making more crypto from your crypto. This is realized either by staking assets—for example, in a liquidity pool, or lending assets in expectation of more rewards distributed by the protocol as a form of participation bonus in crypto.
The reward distributed is mostly the DeFi protocol’s native token. However, the protocol can also distribute rewards in other cryptocurrencies in some cases.
For example, by supplying liquidity in Uniswap pools, the liquidity providers, that is, the yield farmer, receive UNI as a reward.
The liquidity provider (LP) token that represents your share in the pool can be locked in other protocols for even more rewards.
The first yield farming practice is traced to Compound when it began distributing COMP to its lending and borrowing platform, rapidly boosting the number of assets managed by its smart contracts.
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Dalmas is a very active cryptocurrency content creator and highly regarded technical analyst. He’s passionate about blockchain technology and the futuristic potential of cryptocurrencies.