Yield Farming (income farming, profitable farming) is a new way of earning money for cryptocurrency owners. If you have tokens, you can lend them on DeFi platforms (decentralized financial platforms) and get even more tokens back. Surprisingly, often you can earn even more if you borrow tokens.
Decentralized finance and their features
Decentralized Finance (DeFi) is a collection of applications, platforms and services that does not have a main regulatory authority and intermediaries. Each member of the system has the ability to influence the formation of exchange rates.
It is important that derivatives of cryptocurrencies — tokens — circulate on DeFi platforms. This contributes to the safety of funds.
The most popular DeFi exchange is Uniswap. Trading volume for October 2020 amounted to USD 11.2 billion — 51.4% of total DeFi turnover. The Ox platform has been growing for the third month in a row, and in October the volume amounted to $ 1.2 billion. The top 5 exchanges with the largest daily turnover also include Curve, Sushiswap and Balancer.
How Yield Farming works
How do the so-called “farmers” make money? Any DeFi platform should receive as many tokens as possible in order to ensure their quick exchange — high liquidity. For this, the owners of the cryptocurrency, «farmers», place their funds on the exchange, freezing them, and thus forming a pool of liquidity. They receive a commission for this — tokens.
Thanks to the placement, funds appear on the exchange that users can borrow and sell. For this they pay a commission to the exchange or platform, part of which is paid as a reward to the “farmers”.
Risks of Yield Farming
Farming can be much more profitable than investing in a deposit. However, there are risks. They are associated with the high volatility of cryptocurrencies — the difference in rate fluctuations. Also, the risks are associated with the operation of the protocols of each specific platform on which the “farmer” places tokens. For example, the collateral left by the lender can be forcibly sold at a loss. One of the cases when this can happen is a significant change in the rate of the attached token (impermanent loss).