What is Yield Farming? Why Yield Farming?

The world of De-Fi is complex. New technologies, trivial rules, large participants. All of these factors had increase the difficulty to earn profit in the Defi world. However, there are a group of investors who implement various strategies to maximize their profit (AKA yield) in the decentralized world. These investors are called yield farmers.

Image source: https://www.coinbureau.com/guides/yield-farming/

Some common approaches yield farmers use include lending and borrowing activities to earn interest or speculate on price fluctuations. They often do these activities in a decentralized application, also called DAO & dAPP. Yield farming is supervised and facilitated by Smart Contract, an embedded technology on the blockchain to automatically help with transactions.

There are various types of yield farmers, including:

Lending

Cryptocurrency holders can lend their coins to borrowers. This lending activity will be automatically supervised by a smart contract. The lender can eventually earn an interest paid for the loan.

Borrowing

The borrower needs to provide some tokens as collateral to receive a loan from another user. The borrower can then use the borrowed token to farm yield through other approaches. In the end, the borrower can earn a yield and their initial holding. This approach is similar to Leverage in the traditional finance system.

Staking

One form of staking is performed on a PoS blockchain such as Ethereum. The farmer can gain a yield by authenticating other users’ transactions. This fee is often called a Gas Fee.