FAQ 30 – What is Yield Farming?
Definition of Yield Farming
The term “farming” refers to what one is ready to immobilize in terms of passive income acquired (in crypto-currency). This allows the blocking of assets and the generation of tokens. These will then be made available to users as a loan.
Thanks to various strategies put in place, it is possible for a “farmer” to move his crypto-currencies between different platforms. This move increases the performance. This system is complex for beginners since none of the strategies used are known.
How does “farming” work?
“Farming” is the principle of obtaining passive income through the deposit of cryptocurrencies in a “cash pool”.
As a reminder, a liquidity pool is a “set of funds deposited by liquidity providers in a smart contract”.
Among the liquidity pools, we find two categories:
– On the one hand, users have the possibility to exchange their tokens and use them both.
– On the other hand, the suppliers: they represent the Yield Farming
Yield Farming RisksFirst of all, it is not easy to perform Yield Farming, a wrong manipulation can quickly happen. However, incorrect manipulation can lead to significant costs. In addition, you never know what the value of the token will be, it can be very high or not at all. Finally, Yield Farming remains an online system, therefore the main threat therefore remains hacking, in particular through the diversion of certain smart contracts.
Benefits of Yield Farming
Despite the threats seen above, Yield Farming also has many advantages.
This allows you to generate interest through passive income.
In addition, Yield Farming can distribute capital directly to investors without having to contact banks or investment funds.
How is Yield Farming different from staking?
Unlike staking, Yield Farming is more complex and riskier. Indeed, it confronts investors more with a possible loss due to price volatility.
Additionally, Yield Farming users deposit cryptocurrency on Gold Challenge platforms, but with staking, investors use their funds to support the blockchain as well as validate blocks on the network.
The Future of Yield Farming
Yield Farming has a very promising future, in particular thanks to technological advances, and the permanent evolutions of the Challenge. It is very popular and allows to generate rewards with cryptocurrency assets.