While yield farming can be extremely successful, it is also a highly competitive market, introducing new yield farming techniques almost daily. Join us as we delve into yield farming and its future predictions.
Understanding Yield Farming
Yield farming is a risky, high-reward investment technique. Yield farmers, known as “liquidity miners,” seek high return possibilities in exchange for lending digital assets like stablecoins or bitcoin to growing DeFi enterprises or exchanges.
Farmers, in turn, help to ensure the overall health of a burgeoning DeFi project or exchange by supplying valuable liquidity.
Yield farmers lend digital assets through smart contract platforms, decentralized applications, or DeFi exchanges.
Farmers receive interest or fee payments in exchange for lending, or “staking,” valuable digital assets, generally in the form of ‘governance tokens’ unique to the lending platform.
A governance token is a project-specific digital asset distributed to farmers by a protocol or project creator. Governance tokens are designed to motivate token holders to make competent protocol decisions.
Token incentive mechanisms ensure farmers and other token holders are interested in the project’s success.
The utility generally determines interest rates, or demand for, the asset under the loan. The demand to borrow a digital asset frequently correlates with its use cases and popularity, in addition to the Layer 1 or Layer 2 solution it powers.
If a farmer obtains a digital asset incentive in its early stages and the price rises dramatically, yield farmers may see significant gains.
Experienced, successful farmers use complicated farming tactics to compete for the finest possibilities, or “crops,” and maximize returns.
Roles of Yield Farmers
Farmers can increase their yields by executing a variety of duties. They can;
- Liquidity providers
- Lenders
- Borrowers
- Stakers
Liquidity providers
Cryptocurrency is less liquid than the stock market since it is traded less frequently. Liquid providers deposit tokens on exchanges to facilitate traders’ entry and exit from positions.
The exchange charges a fee for trades sent to liquidity providers. Alternatively, liquidity providers may receive fresh liquidity pool (LP) tokens.
Lenders
A yield farmer is a lender who lends cryptocurrency to borrowers via a smart contract and platforms like Compound or Aave, eventually profiting from the interest paid on the loan.
Borrowers
Borrowers, on the other hand, are market participants who utilize one token in a pair as collateral in exchange for the other token in the pair.
This activity allows users to farm the produce using borrowed coin(s). This implies the farmer keeps their initial holding, which may increase in value, and earns a yield on their borrowed coins.
Stakers
The simplest way to become a staker and earn staking incentives is to use a cryptocurrency exchange, such as Coinbase, and its wallet. In turn, you receive incentives based on the amount you have staked.
On proof-of-stake (PoS) blockchains, users receive fees (depending on the payout scheme and the amount staked) if they stake their cryptocurrency with a staking pool or another validator that pays rewards.
Another motivation to become a stakeholder is to gain compounded returns. Any yields earned might be compounded with your existing stake to boost your overall yield.
Liquidity providers can also contribute their yields to the pool, increasing liquidity.
Yield Farming Protocols
Here are some of the best yield farming protocols available for use;
- Uniswap
- PancakeSwap
- Curve Finance
- Aave
- Venus
Uniswap
One of the best crypto yield farming platforms you should be aware of is Uniswap. It’s frequently called the “king of DeFi exchanges.”
Among the decentralized exchanges on the Ethereum network, it is among the most sophisticated. Users can use its liquidity pools to increase the interest they receive on their cryptocurrency investments.
Users can exchange thousands of ERC-20 tokens with it. Liquid providers may receive a share of the trading fees on each swap. Liquidity providers on the Uniswap platform must stake both sides of the pool equally.
Interest rates on the platform will change based on the pool and the state of the market.
Uniswap’s frictionless feature makes it an excellent platform for swapping tokens without trust.
Users are confused by the multiple versions of Uniswap. All versions, however, enhance the accuracy and capital efficiency of the transaction. As a result, customers can benefit from cheaper and better rates.
There are two live versions available right now: V2 and V3. Uniswap V3, the most recent version, has more than 200 integrations and is growing quickly.
Nonetheless, investors need to be cautious when adding assets to liquidity pools. This is due to the possibility of large short-term losses from abrupt price movements.
Additionally, there is a chance that a smart contract will fail and result in losses, just like with any other DeFi platform.
Because the Uniswap protocol is based on the Ethereum platform, gas prices may be expensive. The good news is that using the app doesn’t require identity verification or sign-ups.
PancakeSwap
Chances are you’ve heard about PancakeSwap regarding the top-yield agricultural practices. But if you’re new to cryptocurrencies, this might be your first exposure to PancakeSwap.
One of the highest-yielding farms on the Binance Smart Chain, it was introduced in 2020. This protocol has developed quickly, with a trading volume of about $400 million.
PancakeSwap offers liquidity, allowing customers to yield farms. Users receive Liquidity Pool tokens in exchange, which they may exchange for CAKE or other cryptocurrencies.
Users can become liquidity providers or stake native tokens for incentives on PancakeSwap to generate farms. To become a liquidity provider, you must farm the denominated token and add tokens to the liquidity pool.
This yield farming platform’s large payouts, cheap transaction costs, and high yields are its most alluring characteristics.
The platform facilitates interest-bearing staking pools, BSC token exchanges, and non-fungible tokens (NFTs).
Additionally, PancakeSwap offers a gambling game in which players must forecast Binance Coin’s (BNB) future price. Additionally, the platform provides lottery incentives to DeFi users.
Because of its fascinating features, more users are encouraged to use this platform for yield farming.
PancakeSwap does carry some danger, though. Failure of smart contracts and transient losses due to market changes are a couple of the possible hazards.
Curve Finance
One of the agricultural pools with the best yields on the market is Curve Finance. The largest DeFi platform is Curve Finance, with a total value of over $19 billion.
Curve Finance was created to guarantee profitable annual interest yields and effective cryptocurrency trading.
The platform offers a market-making algorithm that makes the best use of lock funds compared to other DeFi platforms. Both swappers and liquidity providers gain from this tactic.
Curve Finance provides a lengthy list of stablecoin pools with alluring APRs. The APRs offered by Curve Finance are rather hefty. It falls between roughly 1.9% and 32%.
Users can trade stablecoins on the site at low costs and with slippage. Because of their constant base value, stablecoins are regarded as safer.
It’s important to remember that Curve Finance still has some dangers.
Failure of smart contracts and transient loss are the primary dangers for all platforms.
Aave
Aave is an essential component of the finest yield-farming procedures. Regarding yield farming, Aave is a formidable competitor.
The open-source liquidity protocol enables users to lend and borrow digital cash. One of the most well-known yield farming platforms is Aave, which has a market valuation of more than $3.4 billion.
AAVE is the native token used by Aave. Users are encouraged to use the platform by the token, which offers various perks such as fee savings and voting power for governance.
Aave is a decentralized Ethereum network that provides low-interest lending and borrowing of cryptocurrencies. Users can benefit from earning interest on their deposits.
However, the demand for borrowing on the market will significantly impact the interest earned. Based on the state of the market at the time, the interest rate is automatically changed.
Compound interest and rapid gains on investment funds are made possible by the AAVE coins. It is more feasible for users to receive more significant tokens when they deposit more money. Aave also provides consumers with quick loans.
It is a well-liked platform among DeFi users due to its alluring functionality and other advantages. This site allows consumers to get lending rates close to 15% APR. That exemplifies the immense benefits that Aave offers its consumers.
Venus
Venus is one of the farming pools on the Binance Smart Chain with the best yields. This well-known algorithmic money market facilitates decentralized lending and borrowing.
Users can deposit their cryptocurrency holdings, such as stablecoins, ETH, and BNB, to earn substantial interest. Venus also provides users with an easy-to-use solution for lending and borrowing assets.
Users can borrow cryptocurrency in exchange for particular collateral. Users can also earn yields by lending assets.
Among the platform’s standout attributes are its quick and inexpensive transactions. It offers wrapped tokens and a sizable pool of liquidity as well. Users can use collateral to borrow assets.
Thanks to the Venus protocol, users can manufacture synthetic coins at over-collateralized sites to invest in the platform’s financial goods.
Users can receive different incentives on the platform, another attractive feature. The platform, introduced in 2020, is quickly developing and has become one of the industry’s top protocols.
On BSC, the Venus protocol holds assets valued at about $1.5 billion.
Before we delve into the future predictions of yield farming, let’s look at some of the risks associated with yield farming.
Risks of Yield Farming
Yield farming may initially appear to be a simple method of using your tokens to profit from the cryptocurrency markets. Yield farming is not risk-free, though.
When yield farming, there are several ways to lose money. The first line of defense in defending oneself in this relatively new kind of decentralized finance is understanding these hazards. The risks involved in yield farming are;
- Unpredictability
- Impermanent loss
- Rug pulls
- Liquidity pools drying up
- Not being able to keep up with evolving circumstances and tactics
Unpredictability
Extreme price swings are familiar with less liquid, more recent digital assets. Volatility has benefits but can also result in financial losses for users.
There’s a possibility that the price will fall sharply before customers can sell their cryptocurrency tokens because yield farm companies sometimes demand that users lock their tokens for a set amount of time.
Impermanent Loss
The best way to comprehend impermanent loss is to examine liquidity pools where consumers deposit two different kinds of tokens.
For instance, a user must deposit both tokens to establish a liquidity pool that enables other users to exchange ETH for HBAR.
When someone purchases HBAR from this liquidity pool, they add ETH to the pool and take out an equal quantity of HBAR to match the said ETH.
This results in a shift in the HBAR/ETH ratio, increasing the amount of ETH and decreasing the amount of HBAR in the pool. As a result, the ETH value decreases, and the HBAR value rises.
The pool, made up of money deposited by different liquidity providers, also changes the proportion of locked tokens, so they have less of the rising-value token.
This frequently creates a scenario where their tokens’ total worth would have increased if they had held them.
Rug pulls
Rug pulls are a type of scam when a new cryptocurrency token is created and advertised, and the project is abandoned without paying the buyers their money back.
These frauds frequently include large-scale token holders selling their holdings into liquidity pools, depleting the available liquidity and rendering the token worthless.
Liquidity Pools Drying Up
The liquidity can fluctuate when users remove their tokens from the pool since various users across the globe provide them.
When consumers sell their tokens into the pool, they will receive less money than anticipated due to higher slippage caused by low liquidity.
Users can mitigate low liquidity risk by setting slippage allowances on several exchanges. However, there can be situations with insufficient liquidity, and users lose money when attempting to exchange their tokens.
Because yield farming tokens are locked for a predetermined amount of time and cannot be sold, there may be a higher chance of low liquidity.
Not Being Able to Keep up With Evolving Circumstances and Tactics
Payouts from yield farming might vary significantly from day to day. Users may lock their tokens in a high-payout pool at times, only to discover later in the week that the pool has stopped paying out.
Other pools might boost their rewards when customers unstake their tokens, creating circumstances where the liquidity provider might have made more money if they had waited and put their money in the new pool.
Staying on top of each pool’s rewards and formulating a yield farming plan can be difficult.
Future Predictions of Yield Farming
As the decentralized finance (DeFi) market evolves, investors and consumers will have additional chances to make passive revenue. Yield farming is one such opportunity that has become extremely popular recently.
Yield farming entails lending or staking cryptocurrency to receive returns as extra tokens. While yield farming can be extremely successful, it is also a highly competitive market, introducing new yield farming techniques almost daily.
This section will look at the future of yield farming, including its potential expansion and the obstacles it may face.
Here are some insights on the future of yield farming.
- Increased regulations
- Continuous innovation
- Competitiveness
- Integration into traditional finance
- Sustainability
Increased Regulations
As yield farming grows more popular, regulators are sure to take notice. This could result in more strict rules governing yield farming procedures, especially if investor protection is an issue.
While this may make yield farming more complex, it may also enhance the sector’s legitimacy and stability.
Continuous Innovation
As yield farming becomes popular, we should expect more innovation in the space. New protocols will emerge, bringing more complex capabilities and improved user experience.
For example, specific yield farming protocols now offer users insurance during a hack or vulnerability.
Competitiveness
As previously said, yield farming is a very competitive space. As more consumers enter the area, generating meaningful returns will become more complex.
Yield farming protocols must discover ways to distinguish themselves and attract users. This could result in more innovative incentive structures or collaboration with other DeFi protocols.
Integration into Traditional Finance
As DeFi grows, we may expect increasing integration with traditional finance. Yield farming methods could work with traditional financial institutions to provide more diverse investment choices.
For example, a yield farming program could collaborate with a typical bank to offer an interest-bearing account that employs yield farming principles.
Sustainability
Finally, as yield farming grows, protocols will face increased pressure to sustain long-term. This means that protocols must discover ways to strike a balance between user benefits and the protocol’s long-term sustainability.
For example, if a protocol is not collecting enough capital to maintain itself over time, its incentive system may need to be adjusted.
Yield farming is a rapidly evolving industry with much room for expansion. Despite the hurdles and hazards of yield farming, it remains an appealing alternative for investors and users seeking passive income in the defi industry.
We may expect more innovation, integration with traditional finance, and increasing regulation and competition as the industry evolves.
Final Thoughts
Yield farming is a high-risk investing technique in which an investor offers liquidity, stakes, lends or borrows digital assets on a DeFi platform in exchange for a more significant return. Investors may be paid in more cryptocurrencies.
Yield farming is less popular now, but it is still profitable. However, it should only be undertaken by the most intelligent investors who can tolerate or are unconcerned with the hazards of price fluctuation, rug pulls, and regulatory actions.
