What is Yield Farming??
Yield farming can simply be defined as the effective practice of staking or trying to lock up cryptocurrencies
In Return for rewards.....
As a yield farmer you have the opportunity to get rewarded whenever you actually stake Any of your idle cryptocurrencies,or your ERC20 tokens, and other stablecoins which you have, via depositing or via lending it to some wonderful defi projects which makes it effective and possible to be able to stabilize its growth....
We can also refer to Yield farming as what is called " liquidity mining", this is a process which enables the yieldbfarmers to be able to actually invest funds in a mining pool which will create good profits fr them when the project keeps developing and getting successful....
Many of the liquidity providers (LP), will make the yield farmers to actually put their investments on a liquidity pool which is done via smart contracts,this enables the yield farmers to be able to earn his incentives which comes from the percentages which were made from the transaction fees,the lending interests,or the governance token too....
Well because of the high volatility of the market which makes the price to change often,therefore the returns are usually computed by an APY or an annual percentage yield,so it means that the bigger the investments which were accumulated in the liquidity pool,the higher the yield percentage returns will actually be...
Returns on investment....
The APR which means the annual percentage rate can be used to measure the returns, Calculation is usually done by the triplication of the periodic interest rates in combination with the actual number of periods which is present in the year...
Well The annual return rate is usually been charged to the borrowers and it is often earned by the capital investors...
But also On the other hand,the APY is also an effective way of calculating yields.... In this case, what happens is that the return rate is actually been imposed on the borrowers and it is actually been rewarded to the liquidity providers, and not the investors, and they actually do earn via application of the compounding interest...
Profitability of yield farming...
The profitability In yield farming largely depends on so many factors as you actually decided to really put your crypto funds into the liquidity pool in order to be able to really yield rewards....
Well The fact is that the returns on yield farming are been calculated anually,but the price volatility could actually make the result of the calculation to become unpredictable,also the amount of invested capital is a factor too, and also the applied strategies,then also we have to consider the basic liquidation risks which could really affect your collateral.....
Participants/investors are often adviced to invest large funds as a way to avoid liquidation threats,Nevertheless,the returns are still been able to be substantial.....
Bottom line is that As the Defi protocols keeps getting constant development, so also will the yield farming also be a kind of investment which is been highly sought -after because of the high preturns which is involved.....
Risks that comes with yield farming....
Well there are actually some kind of complexities which is in yield farming that do really offer some risks in itself which could really affect both the lenders and the borrowers too...
The crypto market has high volatility
and that do actually make investments to experience several threats which involves slippage and loss.....
Another risk factor is the attacks from hackers and fraudsters/scammers who are just ready to actually take advantage of any available vulnerable pending smart contracts that is actually been in waiting in line to be really verified....
Any kind of DeFi projects, which is actually decentralized as they are, do really perform on an effective automation which exist without a kind of third-party mediation and, also therefore,they really must be able to actually operate flawlessly..the fact is that Any kind of application malfunctions can really compromise the capital of an investor and also the ecosystem as a whole.... The effective immutability of the blockchain can actually render an investment loss to really become something permanent... Anyone who is actually interested are been adviced and urged to ensure that they do engage in some serious researches and also study it well before they decide to get involved in yield farming in order to actually maximize results....
Thanks for reading....
