What is Yield Farming?

Liquidity Mining, an Alternative to Mining Digital Currency
By 
Coin Cloud Team
, published on 
April 21, 2021
What is Yield Farming?

When asked the question, “How do I get digital currency?” you usually get two basic responses. The first is, “You can buy it!” and the second is, “You can mine it!”

But did you know that there’s actually a third option? That’s right, there’s a whole different way that people are acquiring digital currencies like Ethereum. It’s a unique and pretty volatile method called “yield farming.”

Before we get to the rather complicated explanation of what this is, let’s first define some terms that will help us better understand yield farming.

DeFi

DeFi is the shortened name for Decentralized Finance. The term was first coined when the developers of Ox, Dharma, and Set Protocol were messaging each other about wanting a title for all of the decentralized financial applications built on the Ethereum blockchain. Now it refers to decentralized finances in general, which utilize smart contracts on the blockchain (most commonly the Ethereum blockchain) rather than relying on middlemen like exchanges.

Smart Contracts

A smart contract is a computer protocol with an agreement or “contract” written in its code. This contract is usually between a buyer and a seller. The agreement (which is made into a program) is then sent through a decentralized blockchain to be verified before the code is executed. This makes the agreement set in stone … or should I say, set in code. At that point, it’s extremely difficult to alter.

Yield Farming

Once you understand those two things, it’s a lot easier to also understand yield farming, which is basically the process of lending funds in exchange for rewards (in the form of digital currency). By putting your investment into a “Liquidity Pool,” you can lend digital currency to any project of your choice for a variable or fixed interest in return (also in the form of digital currency). Of course, you hope to get back more than you put in.

The Risks

The more digital currency other people put into the pool, the higher the interest you get back. This has the potential to be extremely profitable if a project you’ve lent money to suddenly takes off with lots of others doing the same.

The risk comes from hypothetically throwing your funds into a project that stays stagnant, so the interest you get back is not enough to compensate for the digital currency you invested. It can also be extremely scary as a small investor because those putting in or taking out massive amounts of funds can often have a lot of control over your interest rate.

Overall, most people agree that yield farming is a pretty risky investment at this point in time. If you’re inexperienced in the world of digital currency and Ethereum, you might not want to tackle this beast. We advise thoroughly understanding the ins and outs before taking that leap.

In the meantime, there are plenty of digital currencies available to purchase if you want to test the waters. Coin Cloud machines offer over 30 of the most popular coins and tokens, including a variety of established DeFi currencies.

Disclaimer: The information and views supplied on the Coin Cloud blog are for educational and entertainment purposes only. We are not financial advisors, so please do your research and consult with a trusted financial specialist before investing your money.

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