Doug Turner

15th July 2021

Is Yield Farming Profitable?

Yield farming has recently become a more popular way to earn cryptocurrency, but is it really possible to earn high farm yields from DeFi platforms?

Part of the attraction of decentralized finance (DeFi) systems is that any individual can get involved in investing, lending and borrowing cryptocurrency. With no institutions or banks controlling the distribution of currencies, anyone with the knowledge and understanding of DeFi systems can earn significant interest and profits within various cryptocurrencies.

This freedom to lend and borrow as part of decentralized exchanges, as well as the release of tokens by DeFi platforms onto the market in 2020, has led to a growth in the popularity of yield farming. Although some report to earn huge profits from this process, others have put large investments into various crypto assets, only to return significant losses. So what exactly is yield farming and how do you grow crypto profits from your investments?

what is yield farming defi cryptocurrency earn

What is yield farming?

Simply put, yield farming is a method through which investors can earn interest on their digital assets. By lending their own cryptocurrency back into DeFi protocols or platforms, investors provide liquidity to the market and are rewarded by earning interest back on their investment. Plus, DeFi platforms and protocols have also started to reward investors with their own governance ‘tokens’.

These tokens are the equivalent of a shareholding in a traditional finance system and enable owners to debate, propose and vote on how the protocol is used and changed. One example is COMP tokens, which are released by the Ethereum-based protocol Compound and allow owners to have a say in how the protocol is run.

Through a combination of these tokens and interest, yield farmers can start to earn a real profit from their cryptocurrency investments.

how does yield farming work

How does yield farming work?

In its simplest form, yield farming is the equivalent process of lending and borrowing in the traditional finance system, without any controls being placed on interest rates or loan applications by central banks or institutions. However, there are particular DeFi systems in place that enable efficient and effective decentralized exchanges.

At the base of yield farming (and many other types of exchanges) are liquidity pools. This is where investors lock their tokens and assets into a pool via smart contracts. These assets can be traded and lent out to other users, sometimes using algorithms to determine the distribution and price, while yield farmers earn interest back on their investment.

As well as having many different cryptocurrencies that are farmed for their yields, there are many different liquidity and platforms for each type of digital asset. This means there are lots of options for investors based on the types of digital assets they want to trade.

What is DeFi Yield Protocol?

One of the central policies of DeFi is that lending, borrowing and trading of digital assets should be open to everyone. The DeFi Yield Protocol (DYP) is quickly becoming a central part of the DeFi ecosystem thanks to its ability to open up crypto trading to a range of investors and lenders.

By using a range of decentralized DYP tools, users can provide liquidity to the market by investing their tools into the platform to receive rewards in ethereum (ETH), binance (BNB) or DYP coin. The system automatically converts DYP into ETH or BNB without significantly affecting the price, enabling yield farms to earn significant profits from their investments.

How do you farm DeFi tokens?

As well as investing your own crypto assets into platforms or liquidity pools to earn interest, yield farmers can also earn DeFi tokens through this process. These tokens are a valuable asset in themselves and, in the case of pool tokens, can be earned and retraded to return even higher profits.

These pool tokens are tradeable across lots of different pools and platforms such as Compound or Uniswap. As part of increasingly complex lending chains, yield farmers can earn pool tokens and then put them into the same or different pools or platforms in order to earn more tokens or interest. Although these strategies can be highly profitable, they can quickly become complicated and unwieldy if an investor doesn’t take a logical, well-informed approach.

How to buy Yield Coin (YLD)

As well as earning tokens through the investment of crypto assets, certain tokens are available to purchase individually, such as YLD tokens. With their own inherent value, YLD tokens are linked to investments in over 1000 different projects and companies. Established on the ethereum blockchain, they can be bought and traded through Yield.App to earn significant interest rates.

This is a straightforward way to earn passive income from crypto assets without needing to actively trade currency or establish a chain of earning and trading tokens.

earn cryptocurrency yield farming defi

How do you make money with DeFi?

Many potential investors may wonder what yield farming strategies are the most profitable and effective. The short answer is, it’s dependent on how much asset and time investment you’re prepared to put into yield farming. Although some high-risk strategies promise significant returns, these often require an in-depth understanding of DeFi platforms, protocols and complex chains of investments to be most effective.

If you’re an investor looking to earn some passive income without making too much investment, then you might consider putting some of your cryptocurrency into a trusted platform or liquidity pool and see how much it earns. Once you’ve established this base and gained confidence, you may look to invest elsewhere or even purchase tokens directly.

As with any digital asset investment, you get out what you put into it. So ensure you have a thorough understanding of any protocol or platform before you invest and ensure any strategy you build matches the amount of currency and time you’re prepared to input into yield farming.

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