Yield farming is a DeFi (decentralised finance) investment strategy. Think of it as something similar to earning interest from a bank. In the case of crypto yield farming, however, token holders lend and borrow crypto and in turn, earn rewards.
Yield Farming: The Basics
Essentially, yield farming is a process in which token holders can earn fixed or variable interest by investing crypto. Therefore, yield farmers lend crypto that would otherwise be sitting in a wallet to DeFi platforms and receive rewards in return.
So how does this work? The yield farmer adds funds to smart contracts, known as liquidity pools, which contain funds. These pools are used to power DeFi platforms and marketplaces. In return for lending or “locking” your money in the liquidity pool, you will receive rewards generated by the DeFi platform. Your returns are based on the amount of crypto you invest. The more you invest, the higher your rewards.
It can be seen as a “rewards programme” for those who choose to support and invest in a particular DeFi platform. As with anything else, yield farming has several risks. The price of your investment can fluctuate, resulting in fewer rewards than you initially calculated.
In addition, you need to make sure that you’re investing in a legitimate project. This is because there are many fraudulent projects that do not actually lead anywhere, or shady project owners that run away with the money.
Yield farming is an excellent way for early adopters to support projects they are passionate about. With crypto becoming more popular, yield farming will undoubtedly become more mainstream. Therefore, if you are thinking of becoming a yield farmer, make sure you are fully aware and educated about crypto and the risks involved to increase your chances of long-term success.