What is Yield Farming?

By Wilton Zigler

What is yield farming? In decentralized finance (DeFi) yield farming is a small component of decentralized applications or (dApps) used to maximize the rate of return on your cryptocurrency using various DeFi protocols. Returns can be very lucrative, up to 1,000% APY and higher. With yield returns this high it’s not surprising that user adoption has been increasing. Here are some examples of yield farming.

Lending & Borrowing

Popular DeFi lending platforms such as Maker, Compound, and Aave have established themselves as a credible user priority to borrow tokens. The protocols aim to offer crypto loans in a trustless manner without a central authority for lending purposes. Borrowers can directly take a loan through a decentralized platform known as P2P lending. This financial strategy has had a high growth rate and is the most common tool for locking crypto assets.

Loan takers are willing to pay interest on the amount borrowed in exchange for having a lump sum of money available immediately. However, unlike traditional financial services that use physical property such as, cars, houses and jewelry. In DeFi, smart contracts are used to deposit this amount of currency of at least equal in value to the loan amount.

To put into perspective on the growth of this protocol, Yearn.Finance (YFI) has automated this service to allow your assets to be moved around to collect the best interest on your crypto assets. YFI became the fastest asset to grow over $1 billion in market capitalization in history including stocks and other asset classes.

Staking Liquidity Pool Tokens

What is staking liquidity pool or (LP) tokens? If you ever had a savings account, it’s the same concept but you’re getting more money overtime. LP staking requires you to lock up your crypto temporarily to receive more of that token or coin. The crypto you provide is usually used to form nodes to validate the network and you get rewarded for it.

DeFi liquidity pools allow pairing 1 token or coin with another, a token that has a protocol such as well-known crypto asset like Ethereum or USDT. In the process you will receive fungible tokens as rewards, which acts as a receipt, and you can sell if you decide. Your rewards are proportion to the ownership defined by the ratio of relevant LP tokens you own compared to the total number of LP tokens currently in existence.

Risks

What’s the catch? Like any investment asset there are risks being taken into consideration and seeing if those risks are worth the reward in your investment strategy. Some projects that you are yielding interest on can be very volatile and can affect your returns.

Projects can sometimes have bugs in their smart-contracts, and scams can be created. DeFi platforms depend solely on smart contracts to power the decentralized exchange or (DEX). Scammers can portray a credible project with attractive yields, that are created from the mass contribution of investors, and in return they “rug pull” the liquidity pool leaving yield farmers with little to zero funds from liquidity being removed.

However, these scams can be avoided through proper due diligence and observations for concerns before depositing your funds anywhere.  

What yield farm platform to consider?

Following the launch of Pokket Finance, Pokket farming will begin. Pokket Finance will start with a Pokket Token initial DEX offering or IDO. The community will be able to utilize bought PKKT (Pokket Token) in three Uniswap V2 pools: PKKT/USDC, PKKT/USDT,PKKT/ETH. In addition, users will also be able to stake USDT/USDC with Pokket Finance to earn PKKT.

Yield Farming rewards will be paid out in weekly periods called epochs. Each epoch lasts a week, and after each epoch ends, users can then claim their rewards. Earning yield with Pokket is a new and better financial system in order to maximize returns on crypto assets. Collecting your rewards as you patiently wait for the next pay period can be motivating when seeing higher yields than traditional financial systems.  

Yield Farming will continue to expand and gain exposure as DeFi revolutionizes the global financial space.