Following the strong development of DeFi is the enormous influence of Yield Farming. It is not only attractive in DeFi, but also extremely hot in the Crypto community. So what is Yield Farming, and has created a great buzz in the world of cryptocurrencies, let’s find out in the following article.
What is yield agriculture?
Yield Farming can be roughly translated as productive farming. If farmers measure their productivity, the yield is equal to the total amount of agricultural produce they have harvested. So in the cryptocurrency world Crypto, or decentralized market, DeFi 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 profit by becoming a liquidity provider in DeFi.
How agricultural production works
Participating users can become borrowers, lenders or exchange tokens with each other. And this was done yesterday by smart contracts: smart contracts.
Yield Farming is known to have a close association with automatic market making (AMM) models, popular such as Uniswap, Balancer, etc. For Yield Farming, loans are provided by suppliers, providing liquidity through the pool. These pools can be understood as smart contracts.
Among these smart contracts will appear fees for loans, loans and exchanges. These fees are considered to be revenue from the respective liquidity providers. That is, they will be divided according to their percentage in the pool. In addition to this revenue, some protocols or protocols also use the form of liquidity mining. It can be understood that liquidity mining is simply that in addition to receiving tokens from the liquidity supply, you also receive an additional amount of tokens for your income.
Some outstanding Yield Farming platforms
Yield Farming owns many important and extremely popular platforms such as: MakerDAO, Compound, Uniswap, Balencer, etc. Depending on the platforms, it has different structures, but in general it provides profits through loans and loans to liquidity providers.
MakerDAO: This platform will use the DAI coin and perform productive agriculture on other important protocols such as Compound.
CompoundLiquidity providers on the platform can now profit from loans and loans.
Swap: Liquidity providers will collect transaction fees when they supply their assets to the pool here.
Balancer: BAL combined with other governance tokens.
The advantages offered by Yield Farming
One way that Yield Farming has wonderfully attracted short-term participants is the introduction of the boostrapping protocol. This is considered a new era that has been opened for the DeFi community.
Or the birth of Yield Farming also has a strong impact on other protocols, and this impact can make it grow and develop. In fact, there have been a lot of interactions between them and there has been a strong development for both sides. But this is not sustainable, as is the case with Yearn Finance, Curve and Balancer.
The previous two are all short term benefits and exist only in the short term.
What Yield Farming benefits from is only seen in the short term, but is soon seen as negative. The main result that Yield Farming should do here is to create the value of its products associated with more real and life-long benefits. With a great hope that it will not only stop at Crypto, but also become a major cash flow in the world in the future.
The Risk of Yield Farming
Yield Farming there is a big risk that if participants don’t understand they will potentially lose money as they play here. Speaking of what these risks are, let’s find out here.
Risks of smart contracts
The first risk appears in smart contracts. You know these protocols are often developed by small teams, so the possibility of its bugs in smart contracts is easy. The main cause is the lack of sufficient budget to perform the audit. But even with a check, bugs can still occur and resources will be easily stolen. Cases such as Curve or Bzrx have occurred.
The risk can be liquidated
When the market is highly volatile, this can affect the user’s position and with it the collateral will also be volatile. It can lead to the liquidation of the user’s position.
Risk of bubble formation
The risk of bubbles is a cause for concern. When Compound launched liquidity mining, a lot of things started happening leading to the risk of bubbles occurring in the DeFi community.
Whales have gained many benefits from agricultural production
Whales are those who invest tens of millions of dollars to get a large percentage of becoming governance token holders. The whales are considered to be the winners of this Yield Farming game.
Retail investors, if they get in early, can make a huge profit, but at the same time they can lose some of their money. If retail investors come later, they will certainly lose money because the price to raise is too high right now.
One solution to this problem is that if you join you should be a first comer and at least purchase some governance tokens at an acceptable price.
Sign up early if you don’t want to lose money
Yield Farming has a lot of impressions created for the DeFi space, but there are hidden risks you need to grasp if you are participating in this market. All of the above is the information I give you about Yield Farming. Hope you can answer the question at the beginning of the article.