Yield Farming and its Benefits
“Since the year 2020, The DeFi space has attracted a lot of attention in the crypto industry and beyond. With the advent of DeFi space came the concept of Yield Farming that is similar to the banking concept of lending and borrowing for rewards. The only difference is that the concept is a decentralized one. Lots of investors are showing a craze towards yield farming and thus we must discuss its benefits and why it is gaining popularity”.
Understanding the Concept of Yield Farming
Yield farming is a concept of lending or staking crypto assets in order to generate high rewards or returns in the form of cryptocurrencies. In simple terms it can be considered as a savings account like in traditional banking. Like you deposit funds in a bank to obtain specific percentage of return, in the same way in crypto industry when you provide liquidity to the decentralized exchanges by depositing your cryptocurrencies for a certain period of time, you obtain a percentage of rewards in the form of cryptocurrencies. The difference is that the lending is done here through smart contracts and not through central authorities as in the banking system.
The Yield Farming is measured in the form of Annual Percentage Increase (APY) and at present it is quite high for almost all the cryptocurrencies when compared to interest rates obtained from the banks.
Benefits of Yield Farming
High APY on idle Assets
It is far more profitable to stake or lend through the yield farming mechanism rather than keeping your crypto sitting on a wallet or an exchange for no rewards. The APY at present is quite high for almost all the cryptocurrencies as the Decentralized Exchanges requires high liquidity for serving its users.
The yield farming is done in a decentralized manner through smart contracts and liquidity mining pools ensuring that the investor gets the maximum profit and the high banking fee is removed from the concept. Unlike the banking system where the depositor gets only a share of interest that is earned by the bank through lending, the yield farming’s decentralized nature ensures that the depositor gets the maximum benefits. Also, the risk of human error is completely removed from the picture using the smart contracts.
As the yield farming generates rewards in the form of crypto assets, the value appreciation of the crypto assets locked and rewards obtained will result in increasing the APY to quite an extent. This value appreciation can be extremely beneficial for the investors.
Disclaimer: The article is meant for the educational purpose only and in no way it should be considered as financial advice. Own research on the topic is advisable.
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