Decentralized Finance (or DeFi in short) is a rapidly growing trend in finance, making changes to how people exchange value and do trade.
Of all the advantages DeFi offers over TradFi, the ability to earn high yields might be the most significant.
So just why is it receiving so much attention and how can it pay such high yields?
Our post will help you find the answers to those questions and show you the potential of DeFi yield.
Without further ado, let’s dive in.
An Introduction To Yield Farming
Yield Farming can be generally understood as productive farming.
If farmers measure their productivity by the total amount of agricultural products they have harvested, then in the crypto world or DeFi, participants will use its yield to make a profit.
To put it more clearly, Yield Farming means that users use their assets, here assets in Crypto, to find the maximum source of profit by becoming a liquidity provider at DeFi.
Users who join can become borrowers, lenders, or trade tokens with each other.
And every activity is done through smart contracts.
Yield Farming is known to have a close association with AMM (automatic market-making) models, such as Uniswap, Balancer models, etc.
For Yield Farming, loans are provided from those who provide liquidity through the pool.
These pools can be understood as smart contracts.
Yield Farming has become as popular as it is today in part because it supports projects in terms of liquidity.
Along with that is the benefit for both lenders and borrowers.
Yield Farming helps everyone to have access to capital in the world of DeFi finance.
Demand for leverage
DeFi expands financial possibilities and provides consumers with several options to earn.
This increases demand for leverage – users borrow assets with the intention of making gains that surpass the interest payable.
Borrowing rates are often greater than lending rates paid for the same assets, and yields are typically measured in APR (annual percentage rate) or APY (annual percentage yield).
Stablecoins, such as DAI and USDT, are in high demand since their prices are less volatile.
This creates a situation in which it is feasible to make substantial profits on assets lent out, frequently much beyond the rates provided by banks.
Earning native tokens
Attracting liquidity is one of the most difficult issues that DeFi protocols confront.
DeFi requires deep liquidity for liquidity pools to function, which is why the market can be so competitive.
To attract liquidity, several DeFi initiatives provide token awards.
SushiSwap, for example, carried out a “vampire assault” when it started as a fork of Uniswap during the height of DeFi summer by delivering SUSHI incentives, particularly to Uniswap liquidity providers.
This depleted Uniswap’s liquidity and most likely prepared the environment for the introduction of UNI, Uniswap’s native coin.
Another reason projects issue tokens are to provide users with ownership of the system – after all, this is decentralized finance.
Token holders frequently have a role in protocol governance and can vote on crucial issues.
Token issuance is one significant approach for DeFi protocols to demonstrate that they are genuinely decentralized, which can also be crucial from a legislative standpoint.
DeFi users may often earn a protocol’s native token by supplying liquidity to a pool.
SushiSwap users, for example, can receive double rewards in SUSHI and another asset by supplying liquidity to the system.
Liquidity mining is the act of earning a protocol’s native token by providing liquidity — a supercharged version of yield farming that surged in popularity when Compound debuted its COMP token in May 2020.
Users discovered that they could benefit by borrowing assets to cultivate COMP, resulting in a 1,400% price surge in a matter of days.
Staking, which involves locking up assets in the network, is another way DeFi users may receive native token incentives.
Synthetix users, for example, gain SNX prizes monthly in exchange for staking SNX.
The benefits for staking, like yield farming and liquidity mining, differ based on the protocol.
Earning protocol fees
Small fees are charged by DeFi protocols for operations like borrowing and trading assets.
In exchange for providing liquidity, several DeFi initiatives give a percentage of the fees they make to other customers.
This enables liquidity providers to earn a return on their assets, with rates altering according to the amount of activity attracted by the protocol.
Because they generate a share of the protocol fees, several governance tokens have been nicknamed “productive assets.”
SushiSwap, for example, levies a 0.3% fee, with 0.25% going to liquidity providers and the remaining 0.05% going to SUSHI token holders.
Yield optimization tools
Because DeFi is expanding at such a quick rate, and the quantity of liquidity in pools is always changing, chasing the greatest returns may be difficult.
The difficulty of determining where to put DeFi assets to work has resulted in the development of yield optimization algorithms, which try to identify the optimal rate for consumers across the ecosystem.
They frequently pay greater interest rates than those supplied by standard lending and borrowing processes.
Yearn.Finance, developed by Andre Cronje, is by far the most popular yield optimization tool in the Ethereum ecosystem.
The protocol allows users to deposit their assets, which are subsequently transferred to liquidity pools throughout DeFi to deliver the greatest rates of return for customers.
Yearn’s well-known Vaults product borrows stablecoins to farm yield, but the farmed tokens are exchanged for the user’s deposited asset and given back as yield.
Finance allows DeFi users to take advantage of intricate methods that they would not be able to utilize otherwise, and it avoids the need to spend extra gas transporting assets between DeFi’s multiple liquidity pools.
Conclusion
Decentralised finance is already proven to be a game-changing breakthrough with boundless possibilities.
One of the most compelling aspects of DeFi is yield farming, which provides an opportunity to earn substantial returns for putting assets to work in the ecosystem.
Due to the significant demand for leverage, as well as native tokens and protocol fees, DeFi users can make substantial payouts.
Many users are becoming aware of the number of ways to earn on their crypto assets as the DeFi ecosystem expands and usage rises.
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