Yield farming is a relatively new and hot way to earn passive income from the DeFi protocols. This article will give you an idea of yield farming and how to earn passive income with it.
What Is Yield Farming?
With the rise of the DeFi industry, yield farming is still a new way to earn cryptocurrency. Yield farming or liquidity mining refers to the practice of lending, staking, and holding digital assets across multiple cryptocurrencies or DeFi protocols using complex strategies.
As part of this strategy, farmers contribute liquidity to project pools by lending or staking cryptocurrencies for rewards.
In addition to rewards, many DeFi protocols issue tokens representing users’ shares in liquidity pools. They can switch to other platforms to increase potential profits.
Depending on the complexity of the strategy, the number of coins involved in yield farming can vary from one token to several (usually 7-8) different cryptocurrencies.
Yield farming is a new role in decentralized finance applications that helps provide needed liquidity in DeFi platforms. It lends its assets through smart contracts, giving cryptocurrency owners a trusted way to earn passive income and returns. Generally speaking, when someone talks about passive income, the level is barely 5% or at most 10% on lending and staking platforms.
However, this method maximizes this return, and investors can use strategies to achieve returns over 50% per year. As mentioned earlier, this return is passive, and investors can gain it regardless of market conditions and price movements.
How To Calculate Returns?
Typically, investors can calculate yield farming profitability annually, which means calculating a year’s total return to measure the platform’s win rate. We use two traditional metrics to track the performance of DeFi platforms; two different classic metrics are used – Annual Percentage Rate (APR) and Annual Return (APY).
Both metrics track the returns of specific assets in financial markets. However, investors can also use APY to track compound interest. Compounding is simply reinvesting the return from one investment in another for a higher profit or return.
Since yield farming uses smart contracts, reinvesting profits or investment income is more common than in other markets. To this end, several complex trading strategies involving multiple exchanges and reinvestments have been devised to maximize the possible returns for investors.
One of the newly launched crypto tokens, Gnox (GNOX), uses yield farming as a service and is innovative. The coin has seen significant growth and has excellent potential for further increase amid weak overall market sentiment.