There are only two ways to get a crypto coin, namely by getting a transfer from another party, or by mining. Getting coins by means of transfers from other parties can be done by asking the person who owns the coins. However, it seems that it is rare for someone to give crypto coins if it is not someone close to us. Then by buying crypto coins to other people or through cryptocurrency market places such as Binance and Indodax. The second way by mining is a way to get crypto coins which is quite popular. This mining method or mining usually uses a GPU, Asic Chip, and CPU. However, nowadays the term farming is also known, which is basically a way to get crypto coins too.
In this farming method, some use certain hardware, for example Chia coins which use a hard drive in the farming process. In addition, some farming uses the crypto coin itself. These coins are locked for a reward in the form of crypto coins, this is what Ethereum will do. In addition, there is the term Yield Farming which is gaining popularity. Yield Farming is the future of crypto mining, which in the early days of mining used hardware such as GPUs, CUPUs, and ASIC chips. In the future it does not require expensive hardware, and wastes electricity, but only requires a certain number of coins that are locked for farming activities. Ethereum as the number two most popular cryptocurrency in the world plans to leave the mining process using hardware, switching to farming using the Ethereum coin itself.
How Yield Farming Works
Yield farming process, which is actually similar to mining in Yield farming is done using the crypto coin itself, which involves a liquidity provider (LP) and a liquidity pool. LPs deposit funds into liquidity Pools, which are then where users can borrow or exchange tokens. Then the user pays a fee for the loan and token exchange activity that he does, this fee is passed on by the liquidity pool to the Liquidity Provider in accordance with their respective contributions. So the greater the contribution of a Liquidity Provider to a liquidity pool, the greater the funds he gets as a reward for the contributions they make. The Liquidity Pool itself can get funds from users or people who join the liquidity pool, who “invest” their coins to be placed in the liquidity pool, with the aim of getting “yield” for their placement of funds (coins). However, the implementation of Yield Farming can differ from one crypto coin to another. But basically the process is not much different from what I have described.
The profit obtained from Yield Farming is usually calculated in an annual period. Some profit calculation metrics include Annual Percentage Yield (APY) and Annual Percentage Rate (APR). There is a difference between APY and APR, namely APR, the APR does not take into account the accumulation of profits earned, while in APY it takes into account the profits that have been obtained, this means that profits can be accumulated. However, the APR and APY calculations are only estimates. Because the profits obtained from Yield Farming itself fluctuate. Usually when a yield farming looks profitable, many people invest in the yield farming so that the profit rate decreases.
Yield Farming Risk
Yield Framing generally uses smart contracts, many of these smart contract protocols are developed by small developers who are not or less experienced, so they have the opportunity to experience BUGs. If this bug occurs, investor funds can be lost due to system chaos that is not well anticipated. Another risk lies in composability. In DeFi the entire ecosystem can be built without permission but can be seamlessly integrated with one another. So this DeFi can easily be structured and made to work with each other, but here is the problem. If one of the elements that make up DeFi is damaged then the entire system will be damaged or not working properly.
Basically, yield farming is a process in Decentralized Finance (DeFi) where users can earn rewards for locking their tokens in a Liquidity Pool designed and controlled by a smart contract that handles the ‘trust’ part. Other users can use the crypto currency added to this liquidity pool by taking advantage of lending, borrowing, staking, etc.
In the end, yield farming can benefit people on both ends. For those looking to borrow tokens for margin trading, the liquidity pool can be a useful resource. If you already have some idle crypto tokens in your wallet, yield farming also opens up passive income possibilities. However, the amount of rewards you get from yield farming cannot be calculated precisely.
Before you explore the various steps involved in yield farming, you should understand the different entities involved. First and foremost are users who store cryptocurrencies in smart contracts. The user is called the liquidity provider, while the smart contract is called the liquidity pool. The protocol designs the rules of the smart contract, and the same rules will decide how much return you will receive from yield farming. Other users can use the liquidity pool as a source of tokens for margin trading. However, in the end, everything is controlled through smart contracts.
Starting Yield Farming
As a liquidity provider, you deposit the desired amount of funds into the Yeld Farming smart contract. In most cases, these funds will be stablecoins pegged to the United States Dollar (USD). Some of the options are USDT, USDC and DAI.
These funds are locked by smart contracts and available according to the limits of smart contracts and yield farming platforms. Based on how much you have invested, the yield farming project will give you a suitable return.
The return from the yield farming project will be in the form of the cryptocurrency that you have deposited. However, in some cases, yield farming also gives users access to some tokens that are not yet listed on the open market.
Once you get started with yield farming, you may want to focus on stability by choosing a reputable yield farming project with sustainable returns and a strong back-end.
However, liquidity providers have the freedom to create complex patterns of yield farming designs. It is possible to invest the rewards from one yield farming project in another smart contract and so on. This will help LPs in diversifying their cryptocurrency asset portfolio. Depending on how quickly you resell the rewards from yield farming, you can make a lot of profit. Employing the right strategy will ensure that you get the most out of yield farming. Even when you get a reward in the form of the cryptocurrency you have invested in from the start, there is a possibility to earn even better.
