Protocol

Yield Farming:

What is Yield Farming?

Yield farming is a method of generating passive income within the cryptocurrency space. The process involves providing liquidity by depositing a token into a decentralized exchange (DEX). In return for this liquidity, the DEX pays interest, primarily sourced from customer fees associated with borrowing, swapping coins/tokens, and trading.

Customers’ fees are typically pooled and distributed among the investors who have contributed to the liquidity pool. Investors receive returns, or yield, based on their share of the pool. It is important to note that investors within each liquidity pool are connected solely by providing liquidity in the same token pair.

Yield farming becomes particularly lucrative when investors choose to reinvest their profits. This option allows for the potential of compounding returns, where the initial investment, along with the interest earned on the initial investment, is multiplied by the interest rate. The goal is to achieve an exponentially larger yield than the initial investment.

As a result of yield farming, investors often accumulate a larger amount of the crypto asset they initially provided as liquidity. This increased exposure allows them to earn a higher percentage of interest from the platform, thereby enhancing their overall yield. The visual representation provides an overview of the general yield farming process.

Now, let’s explore various strategies used to grow crypto through yield farming. It is crucial to understand the risks associated with each strategy. Prior to comparing these strategies, consider the following simplified definition of yield farming:

“Yield farming is a practice where funds are stored, and investors receive rewards, sometimes in the form of dividends. These rewards can be significant and potentially double the initial investment. However, it is important to note that yield farming carries high risks, as gains can be offset by substantial losses.”

Yield farming can be a complex subject, especially for beginners in the cryptocurrency space. If you’re seeking a more in-depth understanding, we recommend watching the informative video provided below.

Caveat to Yield Farming:

One important caveat to be aware of when considering the enticing annual percentage rate (APR) of yield farming is that participating in yield farming will exclude you from earning additional rewards from the vault. The yield contract is a compilation where tokens are pooled together, and currently, there is no mechanism to separate individual contributions. As a result, if you choose to engage in yield farming, you will not be counted when the vault contract opens to distribute earnings.

It is crucial to keep this in mind and carefully evaluate whether the benefits of yield farming outweigh the potential loss of additional vault rewards. Ultimately, this decision is personal and depends on your individual circumstances and risk tolerance. There is no one-size-fits-all answer, and it is important to make this determination for yourself.

Additionally, it is important to be aware of the fees associated with entering the LP (Liquidity Provider) Yield Farm. These fees are outlined in our tokenomics and can also be found on the main page of our LP pool. These fees serve to prevent gaming the system and protect against flash loans. It is worth noting that there are excessive fees for removing liquidity within the same block as well as for early withdrawals.

When considering yield farming, it is essential to carefully weigh the pros and cons. If you decide to enter the LP Farm and later change your mind, for example, withdrawing after only one day, you will incur a significant early withdrawal fee. While this fee does contribute to the vault, it will diminish your overall percentage of return based on the duration you were in the LP Farm and not in your wallet. Conducting thorough due diligence is crucial, and it is important to assess the best strategy for yourself.