Yield farming is a method to harness idle cryptocurrencies such as coins, tokens, stablecoins, and put those assets to work in a decentralized finance fund, often generating interest rates that range between conservative 0.25% for less popular tokens and above 142% for some MKR loans.
Crypto lending rates on Defi Rate
A full list of interest rates and projects can be found at Staked.us and DefiRate.
Passive income from DeFi lending and staking isn’t guaranteed and actual returns will depend on each protocol’s approach. The risks run the gamut of missing out on the promised returns due to slow transactions or market volatility, or even losing your entire collateral.
To understand yield farming, we can draw comparisons from traditional finance: money is issued by a central bank, and then commercial banks lend those funds to businesses and individuals. Banks levy an interest rate on those loans, thus making a profit.
In the cryptocurrency DeFi economy, a yield farmer plays the role of a bank, lending their funds to boost the use of coins and tokens. Thus, any cryptocurrency owner can hold their own funds while also participating in lending activity, essentially becoming a one-person commercial bank. This increases the flow of value within the decentralized ecosystem system, which in turn, generates returns for the lender.
“Farming” refers to reaping high annualized percentage gains while providing liquidity for various projects. In a way, yield farming resembles the more traditional practice of staking coins, where the user remains in control of their asset, but locks it temporarily in exchange for returns.
Yield farming has quickly become a point of interest for cryptocurrency enthusiasts and investors, often advertised for providing theoretical “fast gains” in the wake of high risk.
Is yield farming worth it? Let’s dive into the mechanics of yield farming so you can become more educated on what yield farming and how it functions.
In this article, we’ll explore:
- Yield farming’s relationship with DeFi
- How yield farming works
- Are your funds safe?
- The risks of decentralized lending
- The best DeFi projects for yield farming
- The future of yield farming
Is Yield Farming DeFi?
Yield farming is a relatively new concept within the Decentralized Finance (DeFi) ecosystem, and the term entered the popular lexicon of the cryptocurrency world in 2020.
DeFi, an ambitious copy of the traditional finance system, is completely on decentralized Internet protocols. Instead of legal hassles and third-party intermediaries, DeFi offers a no-barrier entry to risk exposure.
DeFi sprung from one of the use cases for the Ethereum protocol. The possibility for cheap and borderless transactions pushed the creation of startups that tried to mimic banks and financial brokers. DeFi applications branched out in various directions including novel cryptocurrency trading algorithms, derivatives trading, margin trading, money transfers, and most importantly, lending markets.
DeFi Pulse – the growth of DeFi in 2020
Cryptocurrency lending entered a phase of functional maturity largely due to two behemoth projects – Maker DAO, and Compound.
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