Yield Farming: How To Earn Passive Income From It

What is Yield Farming?

How does Yield Farming Work?

  • The estimated return in the yield farming process is calculated in terms of annual percentage yield (APY).
  • APY is the rate of return that the user gains over a year on a specific investment. Compound interest is also factored in the APY calculations.
  • Since the DeFi summer of 2020, yield farmers have been chasing eye-opening thousand percent APYs. However, these protocols and coins may be highly risky and susceptible to rug pulls.

The Best Yield Farming Protocols

  1. Aave: This is a cryptocurrency-based lending protocol that allows users to earn interest on deposits and borrow assets. Users can deposit stablecoins into Aave and collect yields ranging from 4.78% up to 13.49%, which can be added to their current earnings in the form of staked AAVE. The DeFi lending pool is open-source and enables customization for developers.
  2. Instadapp: This is the world’s most advanced platform for leveraging DeFi’s potential. Users can manage and grow their DeFi portfolios, while developers can use their platform to create DeFi infrastructure. Over $9.4 billion has been invested in instadapp as of August 2021.
  3. Uniswap: This is one of the largest decentralized cryptocurrency exchanges and DeFi platforms, with liquidity pools that allow users to earn interest on their crypto assets. It’s built on Ethereum and allows users to trade ERC-20 tokens. Because it is Ethereum-based, its gas fees can be expensive, but it does not require any identity verification or sign-ups to use the application.
  4. Sushiswap: This is a fork of uniswap that caused a huge wave on the community during their liquidity move. Sushiswap is now a DeFi ecosystem that allows users to trade cryptocurrency tokens through a multi-chain automated market maker (AMM) model. Liquidity providers are given sushiswap liquidity pool tokens. Other sushi-based incentives include swapping, liquidity pools, staking, and so on.
  5. PancakeSwap: This is a decentralized exchange launched in 2020 and is built on the Binance Smart Chain. PancakeSwap has several yield farms, each of which requires you to stake two tokens in order to receive LP tokens for that farm.

The Risks of Yield Farming

  1. Yield farming is a complex process that exposes both borrowers and lenders to great financial risk. It is frequently prone to high Ethereum gas fees and is only profitable if thousands of dollars in capital are provided. When markets are volatile, users face an increased risk of impamarnet loss and price slippage.
  2. Due to possible shortcomings in the protocol’s smart contracts, it is also vulnerable to hacking and fraud. This might happen as a result of intense protocol competition, in which new contracts and features are frequently unaudited or copied from competitors or predecessors.

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AFRIDEX Techlabs Ltd

AFRIDEX Techlabs Ltd

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A Defi Blockchain Company, using decentralized solutions to revolutionize finance in Africa.