Yield farming is one of the latest trends within the DeFi space. The essence of yield farming is generating passive income with your existing crypto. Essentially, what you have to do is lend out the crypto you own, and earn increased returns in exchange. Yield farming is already revolutionizing the way crypto traders operate, by replacing the strategy of ‘HODL’ing on to one’s digital assets instead of putting them to use.
The History of Crypto Yield Farming:
The hype surrounding yield farming is owed almost entirely to the launch of the COMP token – the governance token of the Compound Finance exchange. Governance tokens allow holders to vote in the governance decisions of a particular exchange platform, or suggest a certain change. The other hot Governance Token is GBIT, just re-launched after a deal with Knightsbridge. GBIT owners are given a vote on the Exchange matters as well as participating in the new coins/token generated within the Knightsbridge Ecosystem, great for the owner and develops a strong Exchange community creating multi-level partnerships and deep interactivity 100% Community Driven. GBIT is already listed on Coin Market, in Google and trades on Forkdelta and the Knightsbridge Exchange.
Compound and Knightsbridge are Ethereum-based Exchange and credit markets, developed on a functional decentralized blockchain system by engineers with liquidity incentives; users are given the opportunity to earn rewards by adding liquidity to the various liquidity pools (more on that later) on the platforms and ‘farm’ income.
Compound Exchange started distributing the COMP tokens to the protocol’s users on June 15, 2020. As demands for the token rose high and Compound rose into a leading position within the DeFi space, the platform also helped bring the concept of yield farming to the mainstream. Since then, quite a few other DeFi protocols have integrated the yield farming strategy with varied economic incentives to convince users to lend out their cryptocurrency.
GBIT kicked of back in 2017 and the community remained tightly held, rather then flooding the market with Tokens after the Crypto crash GBIT hung on, did the hard work of targeting cross-platform paradigms and now with new systems partner Knightsbridge are set to reap the rewards and incentivize frictionless infrastructure for community participants by repurposing viral functionalities of social media and giving the power to the community members.
In yield farming, a group of users put their own crypto assets into liquidity pools and generate yields. These users are known as the LPs, or the liquidity providers.
Liquidity pools are, in fact, smart contracts on a DeFi exchange platform that are programmed to hold funds. When a liquidity provider deposits their crypto into one of the liquidity pools, the code in the smart contracts makes sure they earn rewards in return. Usually the yields are a share of the trading fees the DeFi exchange hosting a liquidity pool charges.
So when liquidity providers deposit their funds into a liquidity pool of their choice, a fraction of the overall trading fees the exchange platform earns goes to them – in proportion to their share in the pools, of course. Plus, at some exchanges, funding a liquidity pool means liquidity providers get to earn that platform’s native token, which can not otherwise be bought in the open market.
The token distribution rules are as varied as the number of DeFi exchange platforms out there. Some exchanges give out tokens to liquidity providers that represent the assets deposited. Take Compound for example: if you deposit the stablecoin USDT into a Compound pool, you’d get cUSDC in return. Some platforms even pay out the rewards in the form of several tokens, which can then be deposited to other liquidity pools, and so it goes.
The basic idea of yield farming is always the same – liquidity providers will enjoy yields directly proportionate to the volume of the liquidity deposited by them. Yield farmers usually move their coins about between different liquidity pools, seeking out whichever one provides the best anticipated interest rates.
APY annual percentage yield is the method most traders use to compute the approximate yields out of a particular liquidity pool.
What is the APY Method?
APY, is an annualized method that predicts the amount of returns one could get over a year. The APY is the rate of return earned on an investment when you account for the effect of compounding interest, presuming the money remains deposited for one year.
The formula for calculating APY is:
APY= (1 + r/n )n – 1
Where r = period rate, and n = number of compounding periods.
Calculations made through the APY method are only predictions, and the anticipated returns are not guaranteed. The volatility in the prices of cryptocurrencies can affect yearly returns, since the price of a particular token can fall at any given moment. As of right now, crypto yield farming is also an uncertain and competitive space, and therefore any estimations can always be proven wrong.