DeFi Yield Farming : How to Earn with Crypto in DeFi with Potential Risks and Benefits
August 3, 2022
The practice of yield farming began in 2020, and many yield farmers earned their returns in the form of APY (annual percentage yields) that can reach triple digits. But this potential return comes at high risk.
Generally, DeFi yield farming consists of shifting cryptocurrency across different marketplaces.
DeFi yield farming is now an essential facet of the DeFi ecosystem. The protocols and coins earned are subject to extreme volatility and rug pulls that mean that the developers abandon a project before the project is completed, and the investor remains with useless currency.
What Is Yield Farming?
Yield farming has emerged as a prevalent DeFi practice that operates similarly to the bank loans – but this time, the user is the bank. It will earn interest on cryptocurrency that is put into the DeFi system.
The world of DeFi is expanding at a rapid scale. The investor, via yield farming aid, can deposit a cryptocurrency’s units safely into a lending protocol or an Automated Market Maker to earn interest or fees from trading or borrowing.
Liquidity providers are the users that provide their crypto for the smooth running of the marketplace. Much of the yield farming takes place on the Ethereum platform via the token ERC-20.
Benefits Of Yield Farming:
Knowingly, many attractive returns on the crypto are offered in the DeFi yield farming. This is a hundred times more than a traditional financial institution like a bank.
Not many elements but Ethereum and a crypto wallet are required to become a yield farmer giving a more straightforward start to the newcomer.
Yield farming is relatively easy to access and thus drives many people in its loop who are looking for good return opportunities.
Availability of Apps:
Investors nowadays enjoy investing in Apps, and that is relatively easy to rack. These are designed with exciting interfaces that are user-friendly. Users are welcome to contribute their cryptocurrency through these interfaces.
Risk Involved In Yield Farming:
Smart Contract Bugs:
The smart contract bug can totally destroy the future of the token by making the price drop to zero. Any hacker who causes these bugs can manipulate the project for numerous possibilities that can also cause the complete loss of the crypto asset. To dodge this risk, continuous auditing of the smart contract is required.
Sometimes the yield farmers might invest in fraudulent projects and schemes, which can result in digital disasters. The fraud company will fly off with the farmers’ money.
Ethereum witnesses high gas prices, and it is a matter of grave concern. This won’t bother the large-scale industries much but is a big problem for the small-scale industries, which might end up losing a lot of money even when they choose not to withdraw their cryptocurrencies from the pool. Any other risk like Liquidation later can bring them enormous losses.
The moment you think of pulling out your money from the pool, you are possibly inviting a liquidation risk for yourself. If you believe your money is getting lost in the collection, you can either pull out your money or keep sticking to the pool.
You could save yourself from a massive loss by pulling out your money. It is better to swap your coins and move forward. Though, there’s a serious possibility that the value of your coins can go down in the coming hours. It would be great if you didn’t think about why you liquidated in the first place. On the different side of that coin, if you might leave it in, you can either lose sums or make money. Yet security is still a question here.
How to calculate returns in DeFi yield farming?
The Annual Percentage Yield (APY)
The annual rate of the return is charged to the borrowers and then paid back to the providers taking compounding interest into account.
The Annual Percentage Rate (APR)
The annual rate of the return is imposed on the borrowers. APR provides the DeFi users figures that can be compared with the rates of other protocols.
Some DeFi protocols that offer yield farming:
The MakerDAO protocol will allow users to generate “Dai” through its multi-collateral Dai system. The collateral assets are approved by the Makers Governance, which is a community that is an operational process in managing the ideals of the Makers Protocol. The Dai cryptocurrency is unbiased and collateral.
AAVE is the leading decentralized finance protocol, and the AAVE token is one of the most significant Defi tokens ever that enables Ethereum investors to easily lend and borrow the cryptocurrency in a hassle-free manner through its decentralized platform.
SushiSwap is a DEX, decentralized exchange with custom-operated smart contracts. SushiSwap is created by Chef Nomi with the native cryptocurrency “Sushi.” It runs on the Ethereum blockchain. Another platform called Bentobox was released by them that provides massive competitive yields.
Instadapp enables users to interact with numerous apps on a single platform. This allows the users to comprehend the true powers of the DeFi world. They have a variety of protocols in a single dashboard that create a better user experience.
What Do You Mean By Yield Aggregators?
DeFi is scattered across numerous blockchains such as Ethereum and Binance Smart Chain. An ecosystem of isolated financial protocols exists within each blockchain. Value DeFi, API Finance, Vesper, and Alpha Honora are yield aggregators.
Yield aggregators successfully fuse the deposits. They amplify the users’ experience as they only need to be concerned about depositing and withdrawal. The yield aggregator takes care of everything between — from interest accrual to selling the farmed rewards.
Conclusion: The Future Of Defi Yield Farming:
In the future, yield farming will subtly ensure that the exchanges have enough coins in the vaults of their protocols to meet the traders’ needs and provide constant revenue for the Liquidity providers as well as the platform owners. This has surged the demand for Defi yield farming development.
It is just the Risk Assumptions that make DeFi yield farming profitable; we should always be good at managing the risks. Even a minor bug in the smart contracts will drain all your money and bring its value to zero. The impermanent loss will cause permanent damages with Liquidation, which will for sure eat away all your earnings.
It is undoubtedly advisable to work with a reputable development company that will surely pull you off through the entire DeFi Yield Farming – A Risk-Benefit Analysis of Earning Crypto with DeFi. You have to ensure that the company you select has experienced blockchain engineers like Suffescom Solutions Inc. They have more than thirteen years of experience in the blockchain world. They can understand your goals well and give you excellent services with full customer support. The success of your DeFi yield farming platforms will depend on your development company. So choose wisely with your mind.