Farming crypto has become easy for crypto investors through the DeFi platform of AQRU
Until recently, active participation was the only way to earn cryptocurrencies. However, the rise of decentralized finance (DeFi) platforms broadened things significantly. Blockchain networks don’t just allow holders to trade and track market movements. With activities such as yield farming, they can impact their favorite projects and earn passively.
But how does yield farming bring revenue exactly? Is there risk involved? What are the best strategies? That’s precisely what we’re going to explain today.
This guide to yield farming crypto was made to explain this passive investment method and educate our readers on how it works. In our following blogs, we will cover specific strategies and tips in more detail. Let’s begin!
How Does Yield Farming Work
Yield farming is the process of investors lending money to a DeFi platform or project. Then, using a smart contract, the lending processing is made official through protocols, which gives the investor the right to collect interest. A simple way to put it would be ‘rewards for early adopters.’
When you think about it, banks operate the same way. You give them money to boost liquidity, and you get a certain percentage in return.
Yield farming cryptocurrencies are slightly different. New projects have to attract customers to choose their token from a sea of others. As a result, investors get all sorts of perks and rewards.
For instance, AQRU offers 12% interest on all cryptos users buy, hold, or transfer. Stablecoins, such as USDT, USDC and DAI pay 7%. Users can deposit using either cryptos or traditional methods. After using the earning calculator, they can know exactly know much they’ll learn in different periods.
This kind of efficiency makes yield farming such a great investment decision. But wait, is there a catch to all of this?
Why do DApps need your crypto in the first place?
There are several reasons why, through yield farming, DeFi platforms offers these benefits to the early investor. Mainly, they seek:
• Liquidity. Expansion and following the roadmap are the priorities of every DApp. They can fund their plans by taking some money and promising more money later on. Lending also improves the liquidity of a coin. The more people buy it, whether it’s mere investing or other goals, the faster the price will grow.
• Hard-forking options. No matter how decentralized DAOs really are, humans are still making key decisions. Many cryptos can make significant infrastructure changes when one party owns a majority of all minted tokens. This fail-safe switch was created to prevent a rogue board member from tanking the whole project. These changes are called ‘hard forks’ in crypto slang.
• Further lending. Sub-lending is a thing in the DeFi world, too. Platforms seek investors to amass capital they’ll lend to interested parties. DApps often charge even more or use deceptive advertising to offset their own generous interest rates.
See, it’s not that difficult, is it? Yield farming crypto is just a fancy term for lending institution money with interest. Compared to traditional banks, DApps each have their own unique idea and provide more intriguing investment prospects. On the other hand, banks can only compete in terms of interest rates, which are out of their control in the first place.
DeFi platforms are complete for yield farmers and provide all sorts of different rewards. But other than liquidity, sub-lending, and future hard forks, there’s one other purpose for this activity – automated market markers (AMMs).
What Are Automated Market Makers?
Decentralized exchanges (DEXs) are perhaps the most popular form of DApps. To function, however, they need liquid capital. This is because of a thing called automated market makers, or AMMs. So what do they do, and what does this have to do with yield farming?
Well, the most significant advantage of DEXs is the ability to trade cryptos instantaneously. AMMs provide them with an active liquidity pool of various cryptos. When users request a trade, they don’t need other users to approve the transaction in real-time. Instead, yield farmers stake their money, and the DEX uses it to facilitate these instantaneous trades.
How to become a liquidity provider? First, you need to choose a liquidity pool (LP). There are various factors determining the feasibility of a DApp. However, you can look at their whitepaper, user reviews, idea, and track record to get a good idea.
Once you’ve chosen an LP, analyze the smart contract requirements. This can be a specific currency, quantity, time period, etc. After the deposit is made and the conditions are met, the liquidity provider earns the right to earn dividends from their stake.
Now that you know what AMMs has to do with yield farming, it’s time to take a look at the activity itself more closely. So let’s start with different types of yield farming.
Types of Yield Farming
There’s a lot you can do with your coins. Yield farming usually takes one of the following forms:
• Liquidity provision. As mentioned already, liquidity pools are needed for DEXs to function properly. Exchange fees go to the liquidity providers. They can come in the form of stablecoins or even new LP tokens.
• Staking LP tokens. When receiving yields by being a liquidity provider, an investor can receive LP tokens. Holders of these coins often get special benefits, of which staking is the most significant one.
• Borrowing crypto. Some coins have a better future, while others serve as collateral more effectively. You can borrow a new coin with the one you’ve received from yield farming.
• Lending. Freelance crypto lending is one of the more popular types of yield farming. Once getting your coins, why not lend them with interest? This effectively doubles the earning opportunities of all your cryptos.
What Are Some of the Risks with Yield Farming Cryptocurrencies
Is yield farming risky?
Cryptocurrencies are speculative assets that always carry a risk of financial loss. Joining any liquidity pools is your own responsibility, no matter what someone says or recommends. This risk comes in several ways. These are the most common things to watch out for when yield farming in 2022:
1. Government oversight. Despite some actions against web3 scammers being already taken, cryptocurrencies and similar digital assets are still mostly undefined by law. This may be good for now, but it’s also the sword of Damocles. The SEC and other regulators may crackdown at any moment.
2. Volatility. A common mistake yield farmers make is choosing volatile cryptos to farm. In just a few minutes, passive earnings of thousands of dollars can evaporate. So do your homework and analyze the chart for at least the last 12 months.
3. Rug pulls. Exit scams are abundant nowadays. It’s the same old story every time. Someone creates a scam coin, pays investors and influencers to promote it, the coin becomes valuable, and they all sell. Don’t pull the trigger if you see too many people promoting a new and unknown project. It’s most likely a scam. Aim for tangible evidence, not hype.
Best Yield Farming Strategies
Yield farming may be risky, but it also provides a significant level of freedom to the average investor. As such, there are many approaches you can take. Even though it’s essential to feel comfortable, experts do agree on a couple of tested moves. We’ve asked DApp developers, brokers, and investors for their opinions. Here’s what you have to do, according to them:
• Stablecoins are slow but steady. If you want to earn passively but not risk too much, take yields in stable coins. From that point onwards, it’s either having a stable investment or taking an LP token that gets turned into a smart contract with good incentives.
• Aim for efficient protocols. The protocol on which your yield coin is based can shape its future. If there are sufficient opportunities for developers and new projects, it’s probably a good investment.
• Consider exit fees. The very best crypto yield farming experts recommend switching LPs whenever possible. Always chase the best rewards. However, many LPs burden investors with exit fees to artificially bind them to the pool. Never join an LP that imposes such requirements. Instead, have the next move in mind.
• Users are as important as creators. Most yield farming enthusiasts focus on the project itself. Sure, you always want to support something meaningful, but users matter, too. If the project covers a particular niche, it has potential. A small but active userbase is better than a large but unenthusiastic one.
And, for all of the above strategies, our analysts have concluded that the best platform is AQRU.
Disclaimer: The information provided in this article is solely the author’s opinion and not investment advice – it is provided for educational purposes only. By using this, you agree that the information does not constitute any investment or financial instructions. Do conduct your own research and reach out to financial advisors before making any investment decisions.