DeFi or Decentralized finance is slowly becoming a topic of conversation for those who are looking for transparency and less control from banks and financial institutions. With DeFi users can bypass intermediaries and authorities and trade without any external interference.
Decentralized finance platforms give users the opportunity to trade and carry out financial transactions freely and remotely at a rapid pace and with security. The list of financial applications that use DeFi is growing, which allows users the freedom of undertaking several tasks that would otherwise have been impossible.
It is the exact opposite of what we know of financial transactions today. DeFi focuses on peer-to-peer transactions and allows two parties to work with each other without any third-party involvement. The technology allows you to use the services anywhere and everywhere; it removes all types of borders, whether metaphorical or physical.
Based on blockchain technology, decentralized finance offers a safe way of undertaking your everyday business that is not prone to any hackers or other types of security threats.
Yield Farming in DeFi
Yield farming is the hottest sector of DeFi; it is responsible for the recent growth of decentralized finance and has played a significant role in bringing it to the mainstream. Because of yield farming, the market cap of DeFi has grown to over $10 billion.
Yield farming is also known as liquidity mining. It involves the use of existing cryptocurrencies to generate rewards and more coins. Simply put, it is similar to earning interest on your savings, and provides a potential avenue to financial benefit from cryptocurrencies beyond the realms of buying and old or trading. In the case of centralized finance, you submit your money into a bank account, which accrues interest and increases in value. With yield farming, you lock up your coins, which are then lent to someone in exchange for a specific interest rate or rewards.
Ever since its introduction in 2020, yield farming has caught on in the crypto world, with many people preferring it because of the high returns. Nevertheless, it is a high-risk investment that is subject to market volatility and can lead to significant losses.
In yield farming, the returns you get are in the form of annual percentage yields.
How does yield farming work?
Yield farming involves the lending of your coins to a decentralized app, which then lends the coins to other users, who use it for trading and other purposes, and you get a cut from the profit they make. This is a process known as staking. The people to whom the coins are lent pay interest on the coins, which is then divided between the lender and the mediating app that is being used.
The users who provide coins are known as liquidity providers or LPs; who submit their coins into liquidity pools. Liquidity pools are based on smart contracts that use blockchain technology to ensure smooth and safe transactions.
With yield farming, there are no restrictions and anyone can be a lender or a borrower. It is like giving a loan to someone to invest in something; if the investment materializes, you get good returns; if it doesn’t, you lose your investment.
Yield farming is the newest trend in the crypto market; if it is here to stay for a long time remains to be seen.