Yield farming Ethereum-based credit markets are offering new strategies for crypto owners to earn incredibly attractive returns on their cryptocurrency, at least a hundred times higher than a traditional bank would offer. Yield farming also offers higher profits than almost any other traditional investment channel, from real estate to stocks and bonds.
Yield farming investors can also turbo-charge their returns with liquidity mining. They receive tokens from the company borrowing their funds, in addition to the high interest on their loan.
Unlike traditional financial services, yield farming integrates smart contracts to manage and mitigate risks related to financial services, using the immutability of the blockchain and proof protocols.
Instead of just having your cryptocurrency stored in a wallet, you can effectively earn more crypto by yield farming. Yield farming investors can earn from transaction fees, token rewards, interest, and price appreciation. Yield farming is also an inexpensive alternative to mining — since you don’t have to purchase expensive mining equipment or pay for electricity.
Liquidity providers deposit two coins to a DEX to provide trading liquidity. Exchanges charge a small fee to swap the two tokens which is paid to liquidity providers. This fee can sometimes be paid in new liquidity pool (LP) tokens.
Coin or token holders can lend crypto to borrowers through a smart contract and earn yield from interest paid on the loan.
Investors can use one token as collateral and receive a loan of another. Users can then farm yield with the borrowed coins. This way, the farmer keeps their initial holding, which may increase in value over time, while also earning yield on their borrowed coins.
There are two forms of staking in the world of DeFi. The main form is on proof-of-stake blockchains, where a user is paid interest to pledge their tokens to the network to provide security. The second is to stake LP tokens earned from supplying a DEX with liquidity. This allows users to earn yield twice, as they are paid for supplying liquidity in LP tokens which they can then stake to earn more yield.