Yield farming in decentralized finance-The new way home for earning money from crypto holdings
Yield farming in decentralized finance is a method of earning money from cryptocurrency holdings. In simple terms, it entails securing cryptocurrencies and reaping the benefits.
Staking and yield farming are similar in some ways. However, behind the scenes, there is a great deal of complexity. It works with liquidity providers (LPs) who contribute funds to liquidity pools on a regular basis.
What does it mean to have a liquidity pool? It’s essentially a smart contract with funds. For providing liquidity to the pool, LPs are compensated. This reward could come from the fees charged by the underlying DeFi platform or from another source.
Moreover, some liquidity pools payout in a variety of tokens. These reward tokens can then be deposited into other liquidity pools to earn additional rewards, and so on. You can see how extremely complicated strategies can emerge very quickly. However, the basic concept is that a liquidity provider deposits funds into a liquidity pool in exchange for rewards.
Yield farming is usually done with ERC-20 tokens on Ethereum, and the payouts are usually ERC-20 tokens as well. However, this could change in the future. Why? The Ethereum ecosystem is now hosting a lot of this activity.
On the other hand, cross-chain bridges and other related developments may one day allow DeFi apps to be blockchain agnostic. As a result, they might be able to run on other blockchains that allow smart contracts.
Furthermore, in order to achieve high yields, yield farmers will typically move their funds around a lot between different protocols. As a result, DeFi platforms may offer additional financial incentives in order to entice more capital to their platform. Liquidity tends to attract more liquidity, just as it does on centralized exchanges.