How Yield farming can help you earn passive income through your digital assets?
Yield is what you earn from an investment. In yield farming, you earn more cryptos from your cryptos by locking your crypto assets in a smart contract-based liquidity pool and moving it through various DeFi platforms and thereby generating the best returns possible.
The yield farmer locks his/her crypto assets in the liquidity pool and through decentralized exchanges (DEXs) lends or borrows or stakes crypto assets and earns interest. The entire process works on the automated market maker (AMM) model. In order to earn maximum rewards one needs to lend and borrow in mining pools that yield the highest returns. This return is generated in annual percentage yield (APY). This is the expected yield returns calculated over the course of a year. The idea is to keep checking which pool is offering the best APY that week and move your assets accordingly.
A person who puts his crypto assets in a liquidity pool and facilitates trading on the platform is known as a liquidity provider, and the person earns interest (also known as yield) for each trade that happens on his/her pooled assets.
Yield farming is a popular way of earning passive income through crypto assets and is an important element of the DeFi ecosystem that aims at minimizing the need for intermediaries during a trade by creating these investment pools and permissionless or trustless liquidity protocols. But since the protocols and the coins earned are notoriously volatile, yield farming requires a well-thought strategy and a thorough knowledge of various DeFi platforms and protocols and complicated investment chains.
Is it the same as liquidity mining?
The other term to know in this context is liquidity mining. In this, along with earning the usual return, you are rewarded with freshly-minted native governance tokens in exchange for your liquidity after the successful transaction of a block. This is an additional compensation and provides you governance privilege in the protocol. Liquidity mining became popular in 2020 when Ethereum-based credit market Compound started distributing COMP — a governance token. Next, Balancer protocol dished out their governance token, BAL, to its liquidity providers and the rest followed. However, the concept of such a coin existed even before COMP. Back in 2018, when Fcoin, a China-based crypto exchange, created a token to reward people for making trades, and the first instance of liquidity mining on Ethereum was in 2019 when Synthetix, a marketplace for synthetic tokens, started giving SNX tokens to users for adding liquidity to the sETH/ETH pool on Uniswap, a cryptocurrency exchange on Ethereum blockchain.
So, what is swap farming?
Binance, the world’s largest cryptocurrency exchange, introduced this feature in December last year, and it is already gaining popularity. Through this, your cryptos earn fee rebates in the first farming phase. One can even earn up to 50% of the transaction fee as BNB rewards on swapping specific token pairs. The token pairs are pooled together, and the price of each is determined by its ratio in the pair. The Automated Market Maker model that enables you to trade your digital assets from a liquidity pool rather than directly with a trader, ensures secure swapping of your crypto pairs.
