What is yield farming? A Beginner's Guide
Profitable farming is a process that allows cryptocurrency holders to lock their assets, which, in turn, provides them with remuneration.
Briefly about this
Profitable farming allows you to block funds while providing a reward.
It involves issuing cryptocurrencies through Defi protocols to receive a fixed or variable percentage. The reward may be much higher than traditional investments, but higher rewards come with higher risks, especially in such an unstable market.
It is impossible to sail through the cryptocurrency seas without constantly studying new trends and buzzwords. One of the last expressions you may have come across lately is profitable farming, a reward scheme that took the world of decentralized finance (Defi) by storm in 2020.
Perhaps one of the main reasons people are attracted to the world of Defi is that profitable farming leads to inexperienced investors going broke and tech-savvy capitalists making their fortunes.
As is the case with most things related to blockchain and cryptocurrency, the concept of profitable farming may be scary at first, but don't be afraid – we will introduce you to everything you need to know below. Let's start with what it is, how it works and why you might be interested in studying it further.
What is profitable farming?
Profitable farming is a process that allows cryptocurrency holders to lock their assets, which, in turn, provides them with remuneration. In particular, it is a process that will enable you to earn fixed or variable interest by investing cryptocurrency in the Defi market.
Simply put, profitable farming involves lending cryptocurrencies through the Ethereum network. When loans are provided through banks using paper money, the amount issued is returned with interest. In the case of profitable farming, the concept is the same: a cryptocurrency that would otherwise be on the stock exchange or in a wallet is issued on credit through Defi protocols (or fixed in smart contracts, in terms of Ethereum) to make a profit.
Farming is usually carried out using ERC-20 tokens in Ethereum, and a reward is a form of ERC-20 tokens. However, this may change in the future. Almost all current profitable farming transactions take place in the Ethereum ecosystem.
How does profitable farming work?
The first step in profitable farming involves adding funds to the liquidity pool, essentially smart contracts containing funds. These pools provide a trading platform where users can exchange, borrow or borrow tokens. After adding your funds to the pool, you have officially become a liquidity provider.
In exchange for blocking your finds in the pool, you will be rewarded with a commission generated by the base Defi platform. Please note that investing in ETH, for example, is not considered profitable farming. Instead, lending ETH on a decentralized money market protocol unrelated to storage, such as Aave, and then receiving a reward is profitable farming.
Reward tokens can also be deposited into liquidity pools, and people usually switch their funds between different protocols to pursue higher returns.
This is a complex process. Farmers often have extensive experience with the Ethereum network and its technical features and transfer their funds to different Defi platforms to get maximum profit.
This, of course, is not easy money. Those who provide liquidity are also rewarded depending on the amount of liquidity provided, so those who receive huge rewards have, accordingly, vast amounts of capital.
The essence of profitable farming
- Liquidity providers deposit funds into the liquidity pool.
- Deposit funds are usually stablecoins pegged to the US dollar, such as DAI, USDT, USDC, etc.
- Another incentive to add funds to the pool may be the accumulation of a token that is not on the open market or has a small volume by providing liquidity to the pool that rewards it.
- Your income depends on the amount you invest and the rules on which the protocol is based.
- You can create complex investment chains by reinvesting your reward tokens into other liquidity pools, which in turn provide different reward tokens.
What is so special about profitable farming?
Roughly speaking, the main advantage of profitable farming is an exorbitantly significant sweet profit. For example, if you get involved early enough to implement a new project, you can generate a reward token, the value of which can quickly increase. Sell rewards at a profit, and you can treat yourself - or choose to reinvest.
Currently, profitable farming can provide more beneficial interest than a traditional bank, but, of course, there are risks here. Interest rates can be volatile, making it difficult to predict what your rewards might look like next year, not to mention that Defi represents a riskier environment to put your money in.
Why should we be interested in this?
During 2020, an insane amount of money was earned (and lost) through the Ethereum network because the platforms for profitable farming are built on Ethereum. And most, if not all, Defi tools use the Ethereum platform. The explosion in popularity shows how much the financial revolution promised by Defi relies on Ethereum, a relatively new network.
Profitable farming is important because it can help projects get initial liquidity, but it is also helpful for lenders and borrowers. This makes it easier for everyone to get loans.
Those who make huge profits often have a lot of capital behind them. But those who want to take out a loan have access to cryptocurrency with very low-interest rates - sometimes as little as 1% per annum. Borrowers can also easily lock funds in an account with high-interest rates.
Although the rapid growth of yield in yield farming has somewhat decreased after its boom in the summer of 2020, there is still the possibility of obtaining excessively high returns on assets compared to what is observed in the world of traditional finance.
Profitable farming has been a somewhat controversial topic in the cryptocurrency world. Not all of the community considers this critical, and some representatives of the crypto community advised people to stay away. For example, flash farms (profitable farming projects that appear for only a week or so) have been criticized by Ethereum developers for their high risk. Ethereum co-founder Vitalik Buterin himself said he would stay away from investing in profitable farming.
What projects are involved?
Currently, there are several Defi projects related to profitable farming. The largest in terms of the cost of smart contracts is the Aave project, which allows users to provide loans and borrow several cryptocurrencies.
The compound is also a Defi platform that allows people to make money on the cryptocurrency they save.
Who can participate?
It is not easy to participate in profitable farming if you have no experience in the cryptocurrency world. Projects like Compound are working to make the world of borrowing and lending accessible to everyone.
But since profitable farming has led to high gas fees on the Ethereum network, those who usually have a lot of capital to start with receive huge profits from lending their cryptocurrency.
What can you do with profitable farming?
Farmers with high returns earn over 100% per annum on popular stablecoins using several strategies.
The Intelfin multiplatform provides fully automated systems that will give you result-defining advantages in the most profitable Defi sector. The platform's algorithms work in such a way that, even without deep knowledge of crypto-economics and all the critical subtleties of the crypto universe, you will gain superiority over other ecosystem participants and feel a decent profit in the first week.
How sustainable is profitable farming?
Some Ethereum developers, some profitable farming projects are short-lived and simply not sustainable. These projects often attract considerable sums in a short period, and they are forgotten about. Some have even been described as scams, especially flash farmers' projects.
As a rule, invest at your own risk, according to the general opinion of experts.
But Defi income farming platforms like the ones listed above will exist for a long time to come. Maybe they will not earn the same amount of money in the coming years, but the world of loans will change.
The future of profitable farming
It is almost impossible to accurately predict the future in such a rapidly changing, changeable environment.
The current level of hype and expectations can potentially create too much load on the network and cause congestion problems. Any resulting price adjustments may cause some farmers to be unable to liquidate their assets, negatively affecting overall confidence in profitability.
At the moment, profitable farming remains a high-risk and high-return practice, which may be worth following if the necessary research and risk assessment have been carried out in advance.