In simple terms, yield farming is one of many ways to earn more crypto by utilizing your crypto. How does this happen? The process involves lending your crypto fund to others through smart contracts also popularly known as the magic of computer programs.
If the above term is not simple enough for you, then understand this “you provide your fund as a loan for others, then you earn fees or rewards in the form of crypto”. The fees or reward you earn is like the return of investment that you often hear in the stocks, only this, is in a form of a crypto reward.
Since the DeFi industry (Decentralized Finance) evolution is emerging, people are welcoming and excited to see its further development. What makes the DeFi loved and unique is the elimination of third-party involvement during a financial transaction. Also, the unique main point of the DeFi technology is it is permissionless, meaning that anybody whoever they are, wherever they are, can do the transaction as long as they have an internet connection and a wallet that is supported. This emerging financial technology is well accepted by society in common, exceptionally by the blockchain enthusiast. So, what is the use case of this new financial structure?
The new concepts then appear with the DeFi structure gradually developing, the yield farming. Yield farming, in an easy term, is holding your asset in cryptocurrency and you earn passive income from it. The decentralized ecosystem supports “money legos” that are built on Ethereum that let anyone earn rewards or passive income with their assets. This then changes the way how people HODL (hold the investment of cryptocurrency). Why keep your asset idle while you can earn passive income with your asset? So, this let many people rush in to do yield farming with their assets.
What is Yield Farming?
Yield farming also called “liquidity mining” is a way to earn rewards by holding the cryptocurrency asset. In an easy term, you lock up your cryptocurrency asset and you generate rewards from it.
Yield farming is also closely related to staking. If you are not familiar with the cryptocurrency world, you may get confused about this since many complexities are going behind yield farming and staking your cryptocurrency. In a simple sense, there is a LPs (Liquidity Providers) in this case let say you as the cryptocurrency asset holder, then you as the LPs add the fund to the Liquidity Pool.
The Liquidity Pool itself is like a pool full of HODLERS funds. In a basic sense, it is a smart contract that contains funds. As a reward for providing funds in the liquidity pool, the LPs then get a reward. The reward itself is generated from fees from certain DeFi platforms or also can be generated from other sources.
The reward of yield farming for staking the cryptocurrency is distributed with the token (other cryptocurrencies). For example, when you stake Bitcoin or Ethereum for a certain time, you get a BNB coin. People then can HOLD their BNB reward or stake it over again to earn another cryptocurrency token. This can be done on and on up to the staker. This structure seems a bit complicated when you know it for the first time, but you will eventually get used to it if you get into this blockchain world.
Yield farming is usually done with the use of ERC-20 tokens on the Ethereum ecosystem. Since it is built on Ethereum, the reward will also be delivered in the type of ERC-20 token as well. However, this is not permanent. All of this can change in the future since many blockchain developers struggle to flesh out the structure. Only, for now, the staking and yield farming activity mostly occur in the Ethereum ecosystem.
The farmers (we call that the yield farmers) usually will move their funds quite often in search of a high yield percentage. As a result of this, the DeFi platform will usually react with additional economic incentives, not only to make the staker HOLD in their platform but also to attract more funds coming to their Liquidity Pool. As they often say, the bigger the fund in the Liquidity pool, the easier it is to attract more liquidity.
Read also : What Is Compound Finance in DeFi?
What is TVL (Total Value Locked)
The rise of the DeFi platform is insane, many developers from all around the world are competing to have trusted, reliable, and profitable DeFi platforms. However, since the DeFi is still in the early beginning stage of its evolution, there are still many flaws that need to be fixed. This then creates a loophole for scammers and hackers to sneak their way to get the funds illegally. So, how to measure the health and trustworthiness of a DeFi platform? The answer is by knowing the TVL, Total Value Locked.
The TVL, in a simple term, is the overall measure of funds as a whole in DeFi’s liquidity. It is considered a useful indicator to assess DeFi’s yield farming market and health entirety. Not only that, the bigger the TVL, it is likely the bigger the market share of a DeFi platform. Knowing the TVL of each DeFi platform and comparing them will be beneficial in search of certain DeFi’s health and market share.
Since vising each DeFi platform will be troublesome, you can just visit a website called DeFi Pulse. You will be served with complete information on many DeFi platforms on the internet, and you can just search which one has the highest amount of funds like ETH or other cryptocurrency assets that are locked in their liquidity pool. It is beneficial for you in search of a good DeFi platform that is healthy and gives good yield farming.
In a natural way, the bigger the value is locked in the liquidity pool, the more stakings and yield farming occur in a DeFi platform. It’s important that you can assess TVL in USD, BTC, or even ETH. Each measurement will give you a different viewpoint on the condition of the DeFi currency markets.