DeFi, or decentralized finance, has taken the cryptocurrency world by storm this summer. While the general population has been reeling from economic uncertainty, crypto nerds have been hunkering down, learning about one of DeFi’s newest, most dynamic, riskiest, and exciting investment strategies: yield farming.
Not to be confused with “liquidity farming”, yield farming is exactly what it sounds like: finding the best yields (returns) the crypto world has to offer. Yield farming is when a user offers their funds to various protocols and pools to seek a reward. This can be through borrowing, lending, or contributing to liquidity pools. Users are then rewarded through fees in a predetermined token, usually affiliated with the pool provider.
Here’s where it gets tricky, or for yield farmers, fun. The whole process can be incredibly complicated. It’s not uncommon to see some people wielding strategies that include a messy patchwork of trading, lending, or involvement in liquidity platforms, all in the goal of maximizing the current state of each platform and market.
By taking advantage of certain states of a market (such as liquidity), users can sometimes rake in profits. Despite the heightened risks investors will take on, yield farming is one of the most profitable strategies crypto users can execute today.
Yield Farming is For the Crazy, the Smart, and the Crazy Smart
While yield farming is technically passive income (seeing as users are paid in fees for borrowing, lending, or providing liquidity) the execution is hardly relaxed. Yield farming is extremely fast-paced and competitive, as farmers must switch between strategies relatively quickly. As too many people execute the same strategy, the market becomes bloated and minimizes the returns all investors receive.
All of this is built on a decentralized system of “money legos” which is the main ethos of DeFi: building products and projects that maximize interoperability. When one platform succeeds, advances, or continues to build, it benefits the ecosystem of all other compatible platforms. At the end of the day, the goal is to maximize the annual percentage yield (APY) – the real rate of return with interest earned on an investment.
Yield farming is not for the faint of heart, or wallet, for that matter. It’s a process requiring a substantial bank of technical fluency and is found to be quite expensive in order to receive a large return. Finally, this process is risky, with smart contracts containing bugs or other points of failure as well as different networks having higher risks than others. It’s unsurprising that despite all of the risk factors that come with yield farming, the crypto community cannot get enough of it.
Can Yield Farming Be Democratized?
There are some projects looking to simplify radically risky yield farming, one such being APY.Finance. After coming in second place in the Uniswap category at HackMoney this past April, APY.Finance has built a robo-advisor that allows users to contribute to a single liquidity pool and congruently have their funds managed in a variety of yield farming strategies. Once funds are added to the liquidity pool, users are given APT tokens that represent their share in the APY.Finance pool.
Members can customize the system to invest based on governance. This massively reduces the heavy lifting investors have to do to gain access to yield farming as a whole. Plus, it’s significantly cheaper (we’re looking at you, gas fees), must be more energy-efficient, and has a UI that doesn’t make you feel frantic and uninformed.
While hopping on every financial trend likely isn’t the best investment strategy, there are methods to approach complex strategies in a much easier, user-friendlier way. With projects such as APY.Finance filling the obvious gaps in the DeFi market, it’s only a matter of time before access to these exciting opportunities will be easily available for everyone, even the crypto noobs.
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