The DeFi industry is getting a lot of attention from the crypto community. Over the last two years, farming has evolved into one of the key drivers of DeFi and the crypto market as a whole. Largely thanks to yield farming, billions of dollars from traditional finance began flooding into the industry.
Initially, this type of farming only existed on the Ethereum network, yet DeFi services have recently popped up in other ecosystems. Learn how you can make money with yield farming in the following article.
How yield farming works
There was a lot of discussion of yield farming in 2020. Then the Compound company released the COMP token for Compound app users. As of today, the company is at the top of DeFi projects.
There are two ways to farm crypto: by adding a token to the liquidity pool or by giving loans to other users.
- Liquidity mining: the user invests assets in a liquidity pool. Thus increases the overall liquidity of the DeFi platform. For providing liquidity, they can receive ERC-20 tokens as a reward.
- Giving loans: a user must register on a DEX (Decentralized Exchange) that supports the loan feature by lending assets to another member.
As a rule, crypto farming implies working with protocols running on the Ethereum blockchain. Therefore, payments are also executed in ERC-20 tokens. The core concepts behind crypto farming are liquidity and liquidity pools.
How to profit from crypto farming
Before you start figuring out ways to make a profit from farming, you should be aware that this technique requires some background knowledge and understanding of the DeFi industry. All of this may seem to be difficult for newcomers to the crypto market, which is why you need to gauge your own capabilities.
If you are absolutely sure of your abilities, you can proceed to the instructions.
Choosing a platform
If you want to seek out yield farming and liquidity mining platforms on the Ethereum blockchain, you can use services such as DeFi Prime, DeFi Pulse and DApp Radar. If you are planning to farm on the Binance Smart Chain blockchain, one of the ways to find projects is to use the aggregator DeFiStation.
Hence, you need to decide in advance which blockchain you will farm on before choosing a platform, and choose a pair where you will provide liquidity. Here the vital criterion is the amount to be invested.
For small investments, consider Binance Smart Chain or Tron blockchain platforms. For much larger investments, however, you can check out projects on Ethereum.
Choosing a wallet
Which wallet to use when farming cryptocurrency is up to your needs. If safety is paramount for you, then a hardware wallet is the best solution. If you need to quickly link a wallet to a platform, make use of mobile or browser-based wallets.
Linking the wallet to the DEX platform
There is no need to register and verify on DEXs for farming. Simply synchronize the wallet with the platform and let the smart contract do the transactions.
Depositing coins into the liquidity pool
Only coins equivalent to the deposit should be added to the pool. For instance, if you would like to farm BTC/USDT pair, then you will need to deposit the equivalent amount in BTC and USDT into the pool. Each user’s share in the pool depends on the amount of their deposit.
Receiving a reward
This is when you finally get a reward for your contribution. As we have noted, you can reinvest the funds received as a result of farming, that is, to direct them to other liquidity pools to boost profits.
How much you can earn from it
The fundamental mechanism of forming a yield from farming is that the liquidity providers offer their assets for the use of DEX-platforms and receive a certain percentage. Moreover, if you farm on different platforms, the yield can vary dramatically.
Furthermore, much depends on the asset: pairs with stable coins are less risky, so the yield from farming them will be more moderate. The more volatile pairs can ensure higher returns, but the risks will be corresponding.
Farming is growing quite rapidly, thus it is possible to earn much more using this method than traditional mining. Particularly since it is much easier to farm than to mine. It takes a lot of money to buy and maintain expensive equipment if mining. While farming, all income comes from investing in various DeFi projects.
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