Yield Farming
This is another method of earning passive income from DeFi when you have unused asset at your wallet. Yield farming is a process which allows the holders of crypto to get some reward based on their holdings. Here the crypto holders deposit a certain amount of their holding crypto into a lending protocol to earn interest from trading fees.
Anyone can stake this asset in the liquidity pool to get return for their staking support to the DeFi. Exchange fees are given from the liquidity pool to the stake holders in (APY or APR)
How does Yield Farming Work
There are two components of Yield Farming has to be discussed to know more about its process.
- Liquidity providers are the holders of crypto assets who deposits the assets into the liquidity pool of the DeFi market so that that the transections can be easily done in the DeFi market. From the transection fees, the liquidity providers get the return.
- Liquidity Pool is the contract and this fund is filled with the fund provided by liquidity providers. The fund from this pool is used in the P2P transections to be executed. Thus, the transection fees generate which will be the profit of liquidity providers.
Order book like Traditional exchange is not required here in case of smart contract. AMM system here creates a Liquidity Pool and works on pre-established algorithm. Who lend fund in the liquidity pool, gets the reward according to their staking contribution.
Two best Yield Farming Platforms
a. Uniswap
Uniswap is mostly popular decentralized exchange platform. It is a protocol on Ethereum mostly for the swap between ERC20 Tokens. Its not taking fee like the exchanges rather it is functioning as a public good where the users can trade token without fees and middleman. Some advantages of UNISWAP
- Simple to exchange ERC-20 tokens
- No need to find buyer and seller for exchange or swap
- No Intermediaries
- Interface is good and huge data to analyze in the application
- At least five wallets can be added like Metamask
- Instant swap
- Allows to deposit fund from ETH wallet directly
- Trading fee is just 0.3% whatever the trading volume, trade size no matter.
- Complete Decentralization
- Open source
- APR is high for staking into Liquidity pool
How to contribute to Liquidity Pool:
a. Pancakeswap
Pancakeswap is another popular swap based defi exchange (DEX) where yield is more and a number of options for swap is available. It has options to buy, sell, swap and exchange of BEP-20 (BSC) tokens. Passive income through offering liquidity is one of the main function of it and APR is so good compared with other. Now a days its popular among traders. Some reasons behind being best on my eyes-
- Variations of liquidity pool available
- Its token CAKE is in top 15 list of crypto
- AMM technology is used for price quotation. So no middleman.
- Trading of BEP-20 Token so easily
- Fee is low and varies between 0.04$ and 0.20$ only
- Quick transection takes only 5 seconds
- APR is very high and varieties of pool available for staking.
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