Yellow Capital Blog/Investments/All About Yield Farming in DeFi: Complete Guide for Investors

All About Yield Farming in DeFi: Complete Guide for Investors

Sunday, February 04, 2024

Yield farming crypto is the TOP 1 opportunity in the global DeFi markets that can be effectively used for above-average yield earning. The key goal of this practice is to maximize rewards from providing liquidity to non-centralized finance protocols. And since numerous ways of yield farming are used today, you will find the best option regardless of your investment goals and capital.

​At Yellow Capital, we believe in empowering our community with knowledge in the global DeFi market. That's why we have compiled all the essential details about the yield farms in this comprehensive guide, the challenges they present and their unique benefits. But before that, let's understand how it works.

What is Yield Farming?

One of the initial aspects to understand about crypto farms is that rewards are attainable by placing investments into a tokens pool. As an investor, you can choose between numerous options, primarily to put crypto in a non-centralized lending or trading pool. Providers who can work for exchange, such as Uniswap or PancakeSwap, get the annual percentage from investments. Most notably, 100% of the rewards will be paid in real time. Here is a detailed explanation of how it works:

  • Farming protocol choosing.
  • Learning and choosing a reliable market maker.
  • Assets choosing.
  • LP token receiving.
  • Depositing in the selected farm!

The steps can be different (depending on the selected platform), but the goal will always be the same - to make investments work. As you know, the rewards will be paid through a protocol's governance token. Because of the numerous advantages of such an innovative approach, the demand for contributing assets to non-centralized lending or trading pools is growing intensively. Those contributing assets as liquidity providers receive an annual percentage yield (APY). It will be paid in real-time.

DeFi yield farming: similarities and differences to traditional investments

Yield farm crypto ensures a much more participatory and dynamic model than traditional investment methods, which still use straightforward strategies (you will find them in bonds, fixed-income securities, mutual funds, and other such investment instruments). In the case of yield farming, you can contribute crypto and intensively shape the growth of blockchain-powered platforms.

  • Such as classic investments, farming aims to generate returns on invested capital through extra tokens or expenses to non-centralized protocols.

  • In both farming and classic investments, there is an absolute trade-off between risk and potential reward.
  • ​​
    Investors in DeFi farming must stay informed about market conditions, assess the yield potential, and adjust their strategies based on market dynamics. Same as those who prefer traditional investment instruments!

Even if there are so many similar characteristics, take into account their key differences, such as:

  • Decentralization and Automation - as you know, farming is operating on open network platforms by smart contracts. At the same time, traditional options involve centralized financial systems.
  • ​Asset Control - in farming, investors will have control of their assets, but for the second option, there are always the third-party institutions (banks or brokerage firms) who will get rights on assets.

  • Regulatory Backdrop - farming is more attractive for investors with an evolving regulatory environment, but the traditional option usually operates within legal structures!

Based on this information, you can see the difference between the two investment options catering to different risk tolerances and financial goals. Below, you will also find more information about the benefits of farming and some risks that can affect your overall rewards.

Staking and Yield Farming: What are the differences?

These two concepts are often used interchangeably, but within the DeFi space, they have so many essential differences. Here are the TOP 3 things how farming differs from staking:

  • Farming aims to maximize returns by actively engaging in the provision of liquidity. Once in staking, it's more about locking up assets for new block creation.
  • Has higher risks than staking due to market volatility and vulnerability of the contract.
  • More flexibility in providing liquidity or withdrawing crypto. When in staking, it's mandatory to lock up assets in a predetermined period!

These are only some differences you should learn after understanding what is a yield farm and how it works.

Yellow Capital Explains Yield Farming

At Yellow Capital, we believe in clarity and education. That’s why our experts prepared this article, where we explain yield farming in-depth, describing the instruments and possible returns to investors. We aim to empower our community with the knowledge and experts to help ensure the best results.

Benefits and advantages of DeFi yield farming

When speaking about the yielding crypto, it's crucial to learn the critical advantages of this type of investment. We guarantee that with all the DeFi protocols, it has numerous benefits and advantages. Here is a TOP 5 of them:

  • High potential returns.
  • Investment values increase with the additional token rewards.
  • Portfolio diversification with the various DeFi protocols.
  • Active involvement of the investor.
  • ​​Flexible staking options!

And for sure, in the crypto yields, you will have simple access to the cutting-edge financial products within the DeFi space.​

Risks and challenges of DeFi yield farming

Before trying to understand how to farm crypto, you must learn all the risks and challenges of such investments. Here they are:​

  • Impermanent loss - an investor can lose the assets with the rebalancing actions. Purchasing extra tokens for lower prices and making more sales is an excellent example of such a situation when there is a high level of risk.
  • Smart contract flaws - hackers can exploit any bugs in the code to get access to the investor's money. Since the DeFi protocols were built on smart contracts.
  • Volatile prices - volatility is the biggest problem of the digital currency and crypto yield. The value will affect the rewards and the assets you’ve deposited. As a result, you can earn more or lose your investment.
  • Over-Crowded Pools - When some pools become highly popular, they can also become overcrowded. As a result of such changes, rewards will be distributed among more investors, making the profit less attractive.
  • Protocol risks - At any moment, governance decisions can change the whole investment process and impact the performance of strategies.
  • Technological Risks - This can have one of the most significant effects on farming since it depends on blockchain technologies. If there are any technological problems (network congestion, for example), the efficiency of the strategies in this case will be much lower.

  • Fees - remember, some DeFi protocols will impose fees on all kinds of activities, and as a result, the overall returns will be reduced!

These are only some of the risks that can be found in this investment instrument. Also, investors should remember the possible evolution of the regulatory landscape for DeFi, and farming will no longer be legal and viable.

​Because of such an intense impact of the risks on the rewards, we at Yellow Capital offer you the tools and knowledge needed to navigate farming. By analyzing risks and preparing predictions, you can minimize the possibility of losing money and increase your overall profit simultaneously. With our help, you can unlock the full potential of your assets and achieve your long-term financial goals.

Is Yield Farming Worth It?

After learning what crypto farm is, the ultimate question for any investor today is whether it is worth it. We at Yellow Capital can tell you that with the right strategy and our help, you can get maximum from your crypto investments. It can be one of the best investments with high profitability. However, it is also one of the riskiest and most dynamic financial activities you can engage in.

In such investments, intelligent contract risks, like hacks, should always be considered since they will affect the overall loss of assets. And there is no guarantee even if you work just with decentralized finance protocols. If investment will work, it also depends on other factors, incredibly influential ones such as the actual price of the protocol token you will get as a reward for your investment. If the protocol token's value drops one day, your profit will decrease immediately and negatively.

So, to become successful in yield farming, it's not enough to have some crypto. You need to prepare yourself as much as possible, learn its rules and understand how to analyze different factors to avoid the impact of the risks.

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Hi, I am Alexis Yellow

Chairman of Yellow Capital

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