Farming

What Is Yield Farming in Cryptocurrency?

Yield farming is a method of earning rewards or interest by depositing your cryptocurrency into a pool with other users. The pooled funds are used to carry out smart contracts such as cryptocurrency lending that generates interest in return.

Definition and Example of Yield Farming

Yield farming is a system where users can deposit cryptocurrency in a pool with other cryptocurrency users to pursue investment gains, most typically through interest earned by lending the pooled cryptocurrency.1 Yield farming is a very risky strategy with potential for high rewards.

Key Takeaways

• Yield farming is a method of investing cryptocurrencies for additional returns.

• Yield farms are decentralized finance investment tools that rely on smart contracts.

• For investors prioritizing aggressive returns, yield farms may provide high interest rates, including more than 100%.

• Participating in yield farms entails assuming a risk of losing your entire investment.

You can find yield farms through decentralized finance (DeFi) platforms such as PancakeSwap or cryptocurrencies exchanges such as Bitrue.

For example, PancakeSwap offers opportunities to join yield farms with interest rates from around 2% to more than 200% APR.2 Bitrue features yield farms with interest rates over 100% the annual percentage rate (APR) as well.3 These high APRs come from transaction fees, lending interest, or joining a proof-of-stake liquidity pool. But take note: It’s possible to lose your entire investment.

Note

Cryptocurrencies are a high-risk asset class. It’s possible to lose your entire investment, so research every opportunity before investing. Due to the risk and complexity of yield farms, they are not appropriate for many investors.

How Yield Farming Works

In many ways, yield farming works like a savings account, where you deposit money with a bank, which then pools depositor money and lends it forward while you earn interest on the funds you deposited. But instead of being converted into a mortgage or a business loan, the cryptocurrency in a yield farm is invested in smart contract applications.

Smart contracts are types of computer programs using blockchain technology, which powers most digital currencies.4

With yield farming, users stake their currency—the cryptocurrency equivalent of making a deposit—with others investing in the same farm. Staking may require you to leave your funds invested for a specific period. Your cryptocurrency may then be used as collateral or to provide liquidity to mining pools, depending on how it is invested.

Note

Cryptocurrency prices are volatile. It’s possible for a currency value to quickly drop while your funds are locked in a liquidity pool or yield farm. This is known as impermanent loss.5

Yield farming begins with the creation of a pool of cryptocurrency assets. These are the steps that take place to facilitate yield farming:2

• Liquidity pool is created: The first step in yield farming is creating a liquidity pool. This relies on a smart contract that facilitates all investing and borrowing for that specific yield farm.

• Investors deposit assets: Investors can connect their digital wallets to deposit currency in the liquidity pool. This is sometimes referred to as “staking.” This is somewhat similar to customers making a deposit in a bank or investing in a mutual fund or ETF.

• Smart contract enables borrowing: The smart contract can facilitate several processes, including adding liquidity for a cryptocurrency exchange market, or lending to others.

• Reward payout: Interest, bonuses, and rewards may vary by yield farm. You may be paid at regular intervals or on a specific future date.

Note: Sendex will have a farming platform to make holders earn income when deposite and become a liquidity providers.