Yield Farming is done using the ERC-20 infrastructure in the Ethereum ecosystem. Similar to the traditional banking system, interest can be earned by locking (staking) the cryptocurrency for a certain period of time. Yield Farming was first introduced with Compound (COMP), a decentralized finance protocol that allows users to earn interest on cryptocurrencies.

How Does Yield Farming System Work?

Yield Farming allows cryptocurrency holders to generate income and works as a lending or receiving system. In Yield Farming, users keep their cryptocurrencies in the service provider's pool or lock their cryptocurrencies. No transactions are made on the cryptocurrencies for a certain period of time and at the end of the specified period, a passive return is obtained in return for a predetermined interest rate.

In Yield Farming, borrowing or lending is done through smart contracts or Automated Market Makers (AMM). Once cryptocurrencies are added to the pool, the user cannot access the asset during the investment process. Therefore, losses can be incurred in the event of a drop in the value of the cryptocurrency. Yield Farming is a reward program for investors who provide liquidity by locking their cryptocurrencies for a certain period of time. For instance, when Metatime Coin (MTC) is locked into the yield farming method, the locked MTCs remain in the system for a certain period of time and provide liquidity. 

What Are the Types of Yield Farming?

There are 3 different types of Yield Farming;

• Liquidity provider
• Lending
• Borrowing

Liquidity Provider

To provide trading liquidity, users deposit cryptocurrencies on a decentralized finance (DEX). Platforms charge a small fee for clearing the cryptocurrency, which is paid to liquidity providers. In some cases, the fees are deposited into liquidity pools.

Lending

Cryptocurrency holders lend money through the smart contract and earn a return on the loan interest.

Borrowing

A Yield Farming user uses the cryptocurrency as collateral and borrows from other users. The borrower earns a return on the borrowed cryptocurrency.

How to Start Yield Farming?

To start Yield Farming:

• First of all, preliminary research is done and the most suitable platform for the investor is determined
• The cryptocurrency wallet required for Yield Farming is created and connected to the platform
• The required asset is transferred to the wallet
• Cryptocurrency is staked
• Earnings are collected

What Is the Relationship Between Yield Farming and DeFi?

Yield farming is a method that has come to the forefront with DeFi projects. Most DeFi projects are built on yield farming. Yield farming is a method for mining cryptocurrencies and earning cryptocurrencies from DeFi projects. Yield farming has become widespread after the rise of DeFi projects. Yield farming is one of the most important revenue generation tools for Decentralized Finance (DeFi). The Aave (LEND), Maker (MKR), and Compound (COMP) DeFi projects were created with Yield Farming in mind. Many new projects continue to move in this direction.

What Are the Risks of Yield Farming?

Yield farming can be complicated for those who have not invested in cryptocurrencies before. Therefore, pre-investment research is necessary. 

Furthermore, DeFi contracts are permissionless and integrated with each other. Therefore, the structures within the DeFi ecosystem are interconnected and work with each other with ease.

How Is Yield Farming Income Calculated?

Yield farming income calculation usually uses the annual percentage rate (APR) and annual percentage yield (APY) measures. The APR takes into account transactions such as reinvesting the yield to generate large returns.

What Is the Yield Farming and Staking Connection?

Staking is a method that helps secure the blockchain network and verify transactions by locking cryptocurrencies on the network. Traders lock cryptocurrencies on the network to verify transactions. The rewards in staking are the cryptocurrencies generated as a result of verification.

In Yield Farming, investors lock their cryptocurrencies to provide liquidity to DeFi lending platforms. In other words, users who opt for Yield Farming earn passive interest returns by investing their cryptocurrencies in DeFi protocols.

Both methods offer rewards for depositing cryptocurrencies in a pool. Both methods generate income.  Staking methods are not based on Yield Farming, but Yield Farming is based on staking.

What Are the Pros and Cons of Yield Farming?

Here are the pros of Yield Farming:

• Yield Farming has the potential to generate returns above APY.
• Yield Farming eliminates intermediaries and is managed using smart contracts.
• Yield Farming offers innovative financial products as part of decentralized finance (DeFi) applications.

Here are the cons of Yield Farming:

• There is a risk of temporary loss if the value of the asset drops when the cryptocurrency is locked on the Yield Farming platform.
• Malicious actors or fraudulent transactions that cryptocurrency ecosystems face can also cause risks within Yield Farming.
• Transactions with cryptocurrencies require tax reporting, which is more difficult in Yield Farming.

What Are Examples of Yield Farming Platforms?

Yield Farming requires the use of certain cryptocurrencies and needs providers. Here are some Yield Farming platforms:

• Aave
• Compound
• SushiSwap
• Uniswap
• Yearn.Finance
• Balancer
• Curve Finance

Aave

Through the Aave platform, the user can link the cryptocurrency to the wallet for staking or borrowing.

Compound

Compound is a platform that helps you lend cryptocurrencies with up to 3% APY.

SushiSwap

SushiSwap is a decentralized platform that offers the opportunity to collect liquidity and earnings from lending.

Uniswap

Uniswap is the platform that enables the exchange of cryptocurrencies without the need for an intermediary.

Yearn.finance

Yearn.finance is an automated and decentralized aggregation platform that allows yield farms to use lending platforms like Aave for high returns.

Balancer

Balancer is a trading platform that acts as a portfolio manager. It offers flexible staking to the user.

Curve Finance

Curve finance is a platform that allows users to trade stablecoins at low fees using a unique market-making algorithm.