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ToggleYield Farming emerged during the strong development of Ethereum and DeFi platforms, with Yield helping to reshape the DeFi world and serving as the "golden key" to DeFi's success today. Join Allinstation in exploring Yield through the article below!
What is Yield?
Yield or Yield Farming is a term in the DeFi market, referring to investors using diverse strategies such as Lending, Borrowing, Staking, and providing liquidity to maximize profits from their initial capital. While in the real world, people deposit money in banks to receive interest, in DeFi, profit opportunities are much more diverse and rich.
Yield Farming became prominent in July 2019 when the Synthetix protocol launched a token reward program for LPs of sETH/ETH on Uniswap V1. Subsequently, Compound Finance launched a Yield Farming program with COMP tokens in 2020, creating a boom of DeFi protocols and investment opportunities.
How Yield Works
Some Specific Yield Activities
- Liquidity Provision: Investors provide liquidity to AMM platforms to receive transaction fee rewards.
- Lending & Borrowing: Depositing idle assets into Lending & Borrowing protocols to earn interest from borrowers.
- Staking: Participating in Liquid Staking Derivatives platforms to receive staking rewards along with Synthetic Tokens to optimize profits.
- Liquidity Mining: Participating in Liquidity Mining programs to receive the project's Native Token, helping the project bootstrap liquidity.
Basic Yield Operating Model
In Yield Farming, Liquidity Providers (LP) provide liquidity to the protocol's liquidity pools. Liquidity pools are smart contracts containing funds, allowing users to borrow, lend, or trade between tokens.
Revenue from Liquidity Pools primarily comes from transaction fees when users perform activities like borrowing, lending, or token exchanges in the pool. This revenue is distributed to LPs proportional to the percentage of liquidity they provide.
In addition to fee revenue, some protocols distribute native tokens to LPs through Liquidity Mining. This is a narrower concept than Yield Farming, where LPs receive additional new tokens beyond their earned funds.
(The translation continues in the same manner for the rest of the text)- Security risks: DeFi protocols can be attacked or scammed, causing users to lose money.
- Price volatility: Some tokens can quickly lose value, causing losses for investors.
- Locked liquidation: Assets participating in Yield Farming may not be immediately withdrawable, preventing users from accessing liquidation when needed.
- Impact on token value: Initial investors may sell reward tokens, which can affect the token's value.
Some Notable Yield Projects
Compound Finance: Compound allows users to deposit their assets into lending pools and borrow assets with dynamic interest rates. Liquidity providers will receive COMP tokens as rewards, helping users earn profits not only from lending interest but also from owning and participating in platform governance through COMP tokens.
AAVE: Aave is a lending and borrowing protocol where users can deposit assets into lending pools and receive interest from borrowers. Aave also provides a special product called "Aave V3", which allows users to lend with features like uncollateralized borrowing and using assets as collateral across different blockchain networks.
Curve Finance: Curve Finance specializes in providing liquidity for stablecoins and similar tokens. Users provide liquidity to stablecoin pools to receive rewards from transaction fees and CRV tokens. Curve also supports liquidity mining programs, where users can earn additional CRV tokens by providing liquidity to stablecoin pools or tokens with high similarity.
SushiSwap: Similar to Uniswap, it is an AMM platform where users can provide liquidity for token pairs and receive rewards from transaction fees. SushiSwap also offers special Yield Farming programs through "Sushi Bar", where users stake SUSHI tokens to receive rewards from transaction fees and additional SUSHI tokens.
Yearn Finance: Yearn Finance optimizes profits for users through automated yield strategies. Main products include "Vaults", where users can deposit assets for automatic strategies such as staking, lending, and liquidity provision to maximize profits. Yearn also uses complex strategies like price difference trading to generate profits from DeFi platforms.
Summary
Yield Farming is a powerful "supplement" that helps unlock many potentials in the DeFi world, providing opportunities to earn high profits from diverse strategies. However, like any investment field, Yield Farming also brings certain risks. Therefore, understanding the operating mechanism, participation strategies, and risk factors is extremely important.
Hope this article has provided you with a clear and comprehensive view of Yield Farming in Crypto. Equip yourself with solid knowledge to step into the crypto investment journey smartly and effectively!
