How to earn money with crypto yield farming?
What is CryptoYield Farming?
Yield farming is the practice of staking or lending crypto assets to earn returns or incentives in the format of much more cryptocurrency.
Before we get there, you should understand what DeFi is. DeFi is an abbreviation for decentralized finance. DeFi is made up of several components, including payments, asset management, and much more.
But what we're about to talk about is landing in markets where Yield Farming, also known as Liquidity Mining, is practiced. You should also understand what staking is because I frequently hear people confuse the two. Staking is the act of pledging coins to a cryptocurrency protocol.
Yield Farming, on the other hand, is you delivering liquidity to a swap contract and being rewarded for it. What makes Yield Farming so appealing is that it moves quickly, with new farms springing up daily, offering returns of thousands of percent. To put it simply, staking helps protect a blockchain network, whereas Yield Farming provides liquidity.
Don't worry if this all seems confusing! I'm going to split it down even further. There are now two basic methods to profit from Yield Farming.
This implies that a decentralised exchange, such as UniSwap or PancakeSwap, will leverage your liquidity, essentially utilizing your coins to permit others to trade and lend cryptos via swaps. Because these exchanges require liquidity to function, you are ensuring that you will be paid for it.
UniSwap, for example, is only a middleman. They require assistance from others. Yield Farmers can help with this. We get compensated a portion of the trading costs for providing our currencies to UniSwap so that those who wish to switch coins can do so. You are now earning a percentage on top of the percentage you are earning from trading fees by providing liquidity. You will also receive the native token of the exchange as well as a reward.
If you provide liquidity to a contract, such as the Cake and BNB swap contract, you will receive BNB from trading fees and Cake token as an incentive. So you're paid in two ways: one is a % of the trading costs given to you in whichever blockchain you're using, and the other is a flat fee. If you're on UniSwap, it'll usually be ETH, and if you're on PancakeSwap, it'll be BNB. On top of that, you're being paid out in the form of what you may call a dividend. You may now leverage the amount you supply by borrowing against it for more sophisticated and higher-risk investors. The way this works is that you will use the cryptocurrency as collateral or insurance on your loan, and because you are borrowing, your positions will become larger, implying that you will earn more from that apy.
The risk is that when the value of the currency you're lending drops, you won't have as much security to back up your loan. And if the proportion of collateral goes below a specific threshold, the exchange will immediately liquidate your trade, something you do not want to happen. However, each exchange has its collateralization ratio, which you should be aware of before borrowing. Again, I would only advocate this to highly experienced investors because leverage trading is extremely hazardous and can result in liquidation if you are not cautious.