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It’s the summer of 2020. It’s the so-called DeFi summer in Cryptoland and others are easily making 200% on their investments.
Their super power?
Yield farming in DeFi!
Yield farming is the process of lending cryptocurrencies to a DeFi platform in order to retrieve more crypto as a reward. This process is more commonly known as staking. Yield farming has surged in the interest of crypto investors over the past year due to the possible high returns and innovations such as liquidity mining.
As always, high rewards come with high risks.
A more in depth review will be coming about yield farming and how it fits into DeFi.
Every platform providing yield farming will be full of this metric; APY. Check out the AAVE webpage or the Hi Dollar platform (as discussed in my previous article if you want to get started) or even on PancakeSwap for examples.
So what does this metric mean?
The abbreviation stands for Annual Percentage Yield which provides a broad idea of what it entails. The APY of a project of yield arm tells something about the potential profits.
Generally speaking, the higher the percentage the higher the risk. Compounding interest is factored into the APY which means that the percentage can only be expected after one full year of farming.
Rewards are Paid out in cryptocurrencies!
Yield farming isn’t always that easy as it might seem. The most profitable strategies are very complex and usually only accessible for more experienced DeFi investors.
Next to that, yield farming with small budgets is usually not very profitable. The cause is the same as why a small budget doesn’t always work when investing in NFTs while the Ethereum gas fees are so high. The transaction costs to switch from one farm to the other are simply too high.
Rewards are paid out in cryptocurrencies. This might affect the rewards heavily seeing the current price action of many crypto assets. This effect can be both positive as well as negative!
Overall, don’t fall for the big clickbait titles of youtube videos where the producer made 1000% APY in a short time. There’s no need to rush your financial journey. Trying to catch the short and extreme gains will most likely disqualify you from the game completely. It can only sting later on in your journey.
Why should you jump in?
Let’s turn the previous quote around. Wherever there is a risk, there is also a reward. Now you always have to weigh them against each other. The great thing about yield farming is that in addition to a possible adrenaline rush, there are also possible profits associated with it.
Let’s take a look at some advantages of yield farming so that you can make the decision before making the jump!
Eventually, it’s all about making your yield farming journey profitable. High APY percentages can be very appealing but not always the smartest move to make.
Being early in a new DeFi project can return huge rewards with relatively speaking small investments.
The challenge is not to make as much profit in the shortest amount of time. The challenge is to stay in the game the longest.
As with every form of investing, blowing up your account will make you leave the market. Without funds, there’s nothing to invest in.
The idea behind yield farming is to put your crypto to work, similar to putting your dollars to work for dividends in traditional investing.
Now that we have both pros and cons clear, it’s time to answer the looming question of whether to start yield farming or not. Rewards of yield farming can be very appealing.
APYs of 100% in a short time are definitely not new for DeFi. However, yield farming should be approached with great care. Especially when taking a potential collapse of Bitcoin and Ethereum into account!
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