![]() ![]() Uniswap is an Automated Market Maker (AMM) that allows users to swap between two different cryptocurrencies i.e. To explain yield farming more clearly, let’s look at one of the simplest ways to farm yield on Ethereum. Yield farming is often a managed process, with “farmers” moving from one protocol to another to maximize their returns at any given time, although “set and forget” strategies are also viable. Returns in yield farming are typically made up of exchange/platform fees and interest (i.e lending) although capital growth of the underlying asset/rewards are commonly taken into account. ![]() Yield farming is the accrual of interest through the use of decentralized financial applications, often as a reward for providing liquidity to a platform. Sometimes described as “money lego”, decentralized finance is permissionless by nature, meaning that financial applications can be built, connected and leveraged without restriction. These applications have been under development since 2016 and now, several years later, their value is being realized at scale. While smart contracts can be used to express all manner of computations, financial applications were one of the first to harness the Ethereum blockchain. The decentralized aspect of DeFi is therefore revolutionary for financial applications, allowing users from anywhere in the world to lend, borrow, trade and more with enormous freedom. The blockchain is then secured by consensus, meaning that nodes cannot arbitrarily change the state of the blockchain or inject malicious code to move funds into their own pocket. The Ethereum blockchain itself is distributed among thousands of nodes, each keeping a record of not only the state of the network (who owns what) but also the code. These products have their logic written into code (“smart contracts”) and this code lives on the Ethereum blockchain. A Guide to Yield Farming on Ethereumīefore we can delve into the concept of yield farming, we must first understand the basics of decentralized finance (DeFi).ĭeFi is a catch-all term for financial products that operate on Ethereum. This guide attempts to explain what yield farming is, how to effectively farm yields and the risks involved along the way. That said, with a good understanding of yield farming and Ethereum, it is possible for investors to capitalize on this rapidly growing income and capital growth strategy while minimizing one’s exposure to risk. The extraordinary returns on investment that can be earned via yield farming are borne from a variety of factors, not least the associated risk. The phrase became widely popularized following the distribution of the Compound Finance governance token (COMP), which saw investors earn Annual Percentage Yields (APY) in excess of 100%. ![]() ![]() Yield farming is an innovative new way to earn passive income using the Ethereum blockchain. ![]()
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