Bake that Crypto
What exactly is this type of farming?
The DeFi market is comprised of a diverse set of decentralized applications focused on providing liquidity, risk management and hedging tools for crypto investors. Their goal is to provide the same type of products that Wall Street investment banks offer fiat investors such as options, futures contracts, short selling and derivatives trading. However, instead of utilizing centralized servers and requiring high fees for their services they rely on blockchain technology to distribute trust across the network which allows them to operate at zero or minimal fee with little resources. As a result, these DeFi companies are able to provide better financial products than traditional centralized institutions due to lower overhead costs. This also enables people from all over the world with access to internet connection can now gain exposure to traditionally exclusive financial markets like stocks
Liquidity mining occurs when a yield farming consumer earns token rewards in addition to compensation for things like fees. This all started when Compound started to issue the COMP token to its userbase. Almost all yield farming protocols reward in a similar manner. Yield farming protocols are developed to increase the success of yield projects. Yield projects and contracts are used to provide passive income for investors from cryptocurrency lending and investing.
The idea behind this is very simple. Not all users will be able to sell or trade their crypto assets at favorable prices that benefit them, especially when it comes to short selling and options trading. Investors who do wish to hedge their exposure, however, can lend out their digital currency for interest payments or charge fees on loans by holding tokenized assets in order to generate additional returns from DeFi. Token rewards serve as an appreciation of value for the services they provide while also strengthening the stability of a community's ecosystem by encouraging market activity and growth through regular consumer participation.
According to Blossom Finance , "The fundamental problem with conventional money is all the trust that's required to make it work." The same concept applies here; borrowing someone else's crypto asset requires a lot of trust, which is why there needs to be systems in place for borrowers and lenders both. These protocols help build trust between users by introducing safety measures to reduce default risk as well as tracking mechanisms like Proof-of-Lending or Proof-of-Liquidity .
This essentially means that you can lend your digital assets to a borrower who in turn can use them to participate in financial markets. There are also ways for you to earn interest or rewards from these loans by lending out your crypto-assets through smart contracts that execute buy and sell orders at predetermined prices simulating an exchange.
What about the risk?
But why would someone even want to do this? Isn't there so much risk?
Yes, it is very risky, but the rewards are also quite high. This is very much a speculative play, similar to FOREX. Investors who are taking the risk in yield farming can face losses if the price of their assets falls too far. However, those who play this game right can generate massive returns that are sometimes comparable to investing into stocks or real estate.
So how do you do it?
he primary ingredients needed for yield farming are:
A community of people with access to digital assets A protocol for building trust between borrowers, lenders and investors The ability to borrow/lend cryptocurrency A way of measuring interest rates and risk ( Yield ) An outlet for earning returns on loaned cryptocurrency
Currently, we have protocols like Coinbase's Asset Germination Service or Compound that focus primarily on the borrowing aspect while providing incentives (in the form of ERC20 tokens) for those who wish to lend out their assets. There are also newer yield farming protocols that reward you for your participation in the lending process.
There is a lot of interest in DeFi right now, and many financial products that will continue to be developed and improved over time. As it stands, the idea of earning yields from traditional financial markets by borrowing or lending digital currency makes a lot more sense than spending $5 on Starbucks lattes every morning (although latte lovers may disagree). These are exciting times as we increase consumer awareness and adoption of cryptocurrency through transparency and innovation surrounding the DeFi industry.