Liquidity farming or yield farming is an act of staking or lending the cryptocurrency into a liquidity pool. It will help you receive your words such as interest, and more of the staked cryptocurrency. Interest rate and reward are often measured in AOY, which is the annual return rate of an asset. It is inclusive of compounding. The greater the difference between APR and APY of an investment, the more frequently the interest compound. Banks and other traditional investments to stick to a flat rate Apr. Keep following our blogs to know more about the best crypto portfolio tracker.
More on yield farming
When investing in a liquidity pool, users will get a liquidity pool token to keep track of the overall contribution. The LP token will represent the percentage of the liquidity pool the investor has provided. The fact is that the word farming in yield comes from the farming analogy about growing your cryptocurrency.
What is a yield farmer?
A crypto enthusiast with in-depth knowledge and high tolerance will try to optimize the yield by staking cryptocurrency. Yield farmers will move to different pools each week, chasing the highest APY. A yield farmer will make an initial investment into a farm using X token. it will receive some Y tokens for participation.
How does it work?
It will go and use the Y token on a liquidity pool that offers more rewards trying to optimize the return. An investor will try to stake his cryptocurrency coin through a lending protocol using a dApp. Yield farming gets used to reward early investors, and governance tokens of the blockchain will be given out to keep them as a user. Liquidity pools will keep the ecosystem alive and are where most of the early liquidity comes from smaller projects.
What are the potential rewards?
Yield farming was first available in 2020 and many farmers abstract about triple-digit APY rate. Nevertheless, the rate brings volatility. Often, the tokens are received from farms that are volatile and prone to rug pulls.
Usually, the yield farmer will get an interest for the stake based on APY. Nevertheless, liquidity mining is when the farmer also gets a new token on top of the interest in participation.
Risk of yield farming
Like anything in a speculative market like cryptocurrency, a higher tolerance forest than normal is necessary. It pulls the projected liquidity funded by investors.
This has become the most desired question of every crypto investor including yield farmers. What happens to my Ethereum when 2.0 comes out? No worries, your current ETH tokens will take a new form as a part of the Ethereum 2 chain also your existing ETH tokens will automatically be accessible on the Ethereum 2 chain.
Some of the best platforms for yield farming
The general go-to platform for farming is well known for decentralized exchanges that support dApps. Some best platforms for yield farming are as follows.
- Pancake swap
- 1 inch network
It’s good to know that a 1 inch network is a place for beginners to start their yield farming journey. 1-inch has a simple guide on how to start farming with them. Keep following our blogs to learn more.