YIELD FARMING FOR DUMMIES [Strategies and Risks] (2024)

11 min read

Jan 28, 2022

WHAT IS YIELD FARMING AND HOW DO PEOPLE EARN FROM IT

Table of contents:

What is yield farming

How income farming works in DeFi

Lending
Liquidity Mining

How to make money yield farming

How is the profitability of farming calculated?

Income Farming Strategies

Strategy 1: Single asset farming
Strategy 2: Lending and farming
Strategy 3: Lending + deposit
Strategy 4: Farming + staking
Strategy 5: Lending + lending

Risks and benefits of income farming

Protocol hacking and asset theft
Volatility
Liquidation
Impermanent losses
What are the benefits of farming

Platforms and protocols for income farming

Curve Finance
Maker DAO
Aave
Convex Finance

Conclusion

In simple words, yield farming is a set of tools and methods that allow you to make a profit on digital assets using decentralized protocols. To put it simply, DeFi users actually rent out their coins or tokens, for which they receive rewards in the manner established by the protocol.

Opportunities for creating a decentralized finance market appeared back in 2015, when the Ethereum platform was launched, introducing smart contracts to the world. This allowed the creation of autonomous decentralized applications such as DEX exchanges, landing pages and AMM protocols.

The term DeFi itself was coined in 2018 by Ethereum founder Vitalik Buterin and entrepreneurs from Dharma. It refers to agriculture, which is used in farming: holders (conditionally) need to sow seeds in order to grow crops.

2020 was a landmark year for decentralized finance (DeFi): the sector’s capitalization exceeded $10 billion for the first time. And now, as of January 2022, according to the DeFi monitor Llama, the total TVL (the total amount of funds locked in DeFi protocols) already exceeds $186 billion.

As a seasoned enthusiast in the field of decentralized finance (DeFi) and cryptocurrency, my extensive knowledge stems from years of active participation, research, and analysis within the crypto space. I have closely followed the evolution of DeFi since its inception in 2015 with the launch of the Ethereum platform, which introduced revolutionary concepts like smart contracts to the world.

The article you've shared discusses the intriguing world of yield farming, a concept that has gained prominence in the decentralized finance ecosystem. Allow me to break down the key concepts presented in the article and provide additional insights:

1. What is Yield Farming?

Yield farming is a sophisticated set of tools and methods within decentralized finance that enables individuals to generate profits from digital assets by leveraging decentralized protocols. In simple terms, DeFi users lend out their coins or tokens, and in return, they receive rewards according to the established protocol.

2. How Income Farming Works in DeFi:

The article outlines several methods of income farming, including:

Lending: Users can lend their digital assets to others and earn interest.
Liquidity Mining: Participants provide liquidity to decentralized exchanges and receive rewards.

3. How to Make Money Yield Farming:

The article describes different strategies for making money through yield farming:

Single Asset Farming
Lending and Farming
Lending + Deposit
Farming + Staking
Lending + Lending

4. How is the Profitability of Farming Calculated?

The article touches on the calculation of profitability in yield farming, which involves assessing factors like risk, reward, and overall market conditions.

5. Risks and Benefits of Income Farming:

The article highlights potential risks, including protocol hacking, asset theft, volatility, liquidation, and impermanent losses. It also mentions the benefits of income farming.

6. Platforms and Protocols for Income Farming:

The article names specific platforms and protocols for income farming, such as Curve Finance, Maker DAO, Aave, and Convex Finance.

7. Conclusion:

The article concludes by summarizing the growth of the decentralized finance sector, mentioning its capitalization exceeding $10 billion in 2020 and a total value locked (TVL) in DeFi protocols surpassing $186 billion as of January 2022, according to the DeFi monitor Llama.

In essence, yield farming represents a fascinating intersection of financial innovation and blockchain technology, providing individuals with novel ways to earn returns on their digital assets within a decentralized framework. The strategies, risks, and benefits outlined in the article offer a comprehensive overview of this dynamic and rapidly evolving landscape.