For example, if it is SushiSwap, then their dashboard is provided by Sushi Coins. That is, the project rewards you with its tokens for staking their liquidity on a centralized exchange. Thus, the yield farming platform helps projects increase the size of their liquidity pools. Yield farming is the process of generating additional profit by users of DeFi-protocols for providing loans or obtaining loans, as well as for providing liquidity to decentralized exchanges .

yield farming

Yield farmers provide increased TVL to a given protocol, driving higher awareness and more usage. In returning to the same two questions, the answer to the first question — what value do farmers provide? Rebecca McClay is a financial content editor and writer specializing in personal finance and investing topics. For more than 15 years, she’s produced money-related content for numerous publications such as TheStreet and MarketWatch, and financial services firms like TD Ameritrade and PNC Bank.

How DeFi Impacts Staking

However, the most popular lending tokens by total value locked are Ethereum, Binance Coin, Tron, Avalanche, Solana, and Polygon, among others. Crypto lending happens on social finance platforms that offer peer-to-peer lending. Tokens can be used for lending purposes on crypto borrowing and lending platforms like BlockFi.

  • Before you can start earning yield on your cryptos you need to get a software wallet like MetaMask .
  • Yield farming will then deliver on crypto’s broader promise — democratizing finance and allowing anyone, regardless of sophistication or wealth, to provide these core sources of value.
  • But in the last few years, pooled management systems have grown in popularity, particularly in directing capital.
  • The lesson here is that simply because something has attractive returns, doesn’t necessarily make it good.
  • Of course, you should be aware of the drawbacks and risks to yield farming and liquidity mining.

In practice, they operationalize this by buying governance tokens of the large liquidity protocols to redirect extra rewards to their token’s pool. Yield farmers allocate holdings towards capital-constrained traders, which allows for those traders to express views on asset prices more efficiently. In the future, yield farmers may also provide value by allocating holdings towards higher-quality borrowers and projects.

In effect, investors are building an investment that is similar to what exchanges offer, but by cutting out the exchange, you may be able to pay lower fees. Most exchanges charge a fee for staking your crypto for you — which is typically a percentage of your returns — and you may also have to pay gas fees to stake your tokens. Different DeFi protocols take different approaches to depending on the exact goals they aim to achieve, which may include one or both of the objectives above. Yield farming has enabled countless projects to bootstrap their growth at a quicker pace to secure hundreds of millions to billions in user funds.

What Cryptocurrencies Can You Yield Farm?

It’s also worth keeping in mind that these are only estimations and projections. Yield farming is a highly competitive and fast-paced market, and the rewards can fluctuate rapidly. If a yield farming strategy works for a while, many farmers will jump on the opportunity, and it may stop yielding high returns. Curve Finance is the largest DEX with a total value locked of $7.9 billion at the time of writing.

Liquidity providers need to identify a liquidity pool that offers good interest rates for providing liquidity. Then, they must decide on a token pair and select a DeFi platform that either offers a customizable liquidity pool or an equilibrium liquidity pool. Similarly, lenders and borrowers need to find a DeFi protocol that requires little or no collateralization for loans.

Please note that some of these strategies may become obsolete with applications deprecating incentives. As builders, we at Jump hope that management and governance will continue to evolve, increasing the ratio of value-creating to value-extractive activities over time. For instance, yield farmers could be incentivized to support useful code upgrades just as they are currently rewarded for selecting high-quality validators. Defenses like square root voting may also help make bribery, as well as other methods for large players to amass voting power, less viable. Some activities look like liquidity provision, but can be subtly different.