In a previous article we were talking about De Fi, financial platforms that have become very attractive and popular within the blockchain environment thanks to the high returns they offer, investors will always be inclined to seek the most efficient ways to maximize their income, understanding each other for efficient, those that take up less time, offer a good return and the least possible risk, this is something that the De Fi have achieved through the use of smart contracts.
As a review, we will say that Decentralized Finance (De Fi) are financial platforms that mainly offer the exchange service (swap) of cryptocurrencies, as well as investment options related to that service. Operations in this type of environment are much easier to execute than in the case of DEX since they are all governed by the use of smart contracts. Therefore, it represents a very efficient mechanism, even in some cases quite economical to exchange currencies.
The Swap, the fundamental basis of any De Fi
Every De Fi platform has its smart contracts and its way of managing the funds placed there, however, most of them use the same mechanisms used in the pioneering platforms in this type of environment: Compound and Uniswap. This business model, in short, is responsible for capturing liquidity and offering investors, providers of said liquidity rewards through its governance tokens. This liquidity is used to execute the exchanges that are made through the De Fi platform, as well as to provide stability and confidence to the platform.
One of the advantages of this type of platform is that it allows users to exchange their tokens for others in a very simple way, without having to go to the traditional trading operations carried out on exchanges, be they centralized or decentralized. The De Fi also offers the opportunity to acquire or sell tokens even before they are listed on an exchange, which has made them the ideal mechanism for project developers to obtain financing and investors to make early investments. before the token value of newly created projects is increased.
Yield Farming within De Fi platforms
One of the investment modalities that crypto assets provide is Yield Farming, this type of operation consists of blocking our digital assets within a De Fi, through a smart contract, and in this way obtaining commissions through governance.
The fundamental concept of Yield Farming is to generate income, in the form of other tokens, by “betting” your crypto assets on a De Fi platform, this allows obtaining “passive” high-performance income. Yield farming differs from Staking (another passive way of generating income), in that the first is used to provide liquidity for exchange operations in De Fi, while the second, gives the possibility of acting as a validator in networks based on PoS protocols (and get rewards) by keeping your assets inside your wallet.
Yield Farming generates passive income, basically in two ways:
Protocol incentives: the investor locks his funds within the De Fi to obtain rewards or native interests of the project, which reward him for "supporting" it.
Tokens for providing liquidity: the user receives tokens from the project by adding liquidity to it, generally by making pairs of currencies, in this way liquid pools are created.
It is important to mention that, depending on the platform, these two types of operations have different names or denominations, which sometimes makes it a bit difficult to explain or understand clearly and precisely, each of the types of income referred to above.
Money has to be moved, so more money is generated
If you do not feel very comfortable doing trading and you prefer to hodl your favorite cryptocurrencies, an option so that they can continue to generate a passive income (in addition to that generated by the increase in the value of cryptocurrencies), is to place it within a De Fi platform to generate other cryptocurrencies, so you can increase its performance.
Something very to take into account, that when we make investments through Yield Farming, is that, in the same way, that when we make hodl there is a risk that the value of cryptocurrencies instead of increasing, this can cause that, instead If you experience positive results, you could even generate losses, so you have to carefully evaluate which investment strategy is the most appropriate for you.
I hope I have contributed a little to the understanding of the operation of Yield Farming as an investment mechanism, I would like to be able to exchange my opinion with you regarding this very interesting investment opportunity.
