DeFi (Decentralized Finance) is an ecosystem on the blockchain or cryptocurrency that is being loved. In DeFi there is also Yield Farming, what is Yield Farming?
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Yield Farming is liquidity mining or liquidity mining to generate crypto asset rewards or prizes. Simply put, Yield Farming is the newest way to generate crypto assets with the crypto assets you have.
Each new DeFi project often provides rewards or gifts to its members. New projects also issue new tokens frequently. So, people are interested in joining the members.
How Yield Farming Works
The most common method of Yield Farming is to use the DeFi app and earn tokens. The Yield Farming mechanism depends on the requirements and features of the DeFi application. The practice starts with offering users small transaction fees.
Yield Farming uses an automated market maker (AMM) and involves Liquidity Pools (LP). It’s different from the concept of crypto exchanges on exchanges in general, where traders buy / sell crypto assets at a certain price by getting a limit position. LPs act as owners of crypto assets that store their funds in liquidity pools or Liquidity Pools.
This Liquidity Pools acts as a place or market when users borrow their assets, borrow them from other users, or simply exchange these assets for ERC-20 tokens.
Members will be charged certain fees, these fees will be paid to the liquidity provider in accordance with the share they give to the Liquidity Pools. Usually these funds are stored in the form of stablecoins pegged to USD such as DAI, USDT, USDC, BUSD and others. Some protocols usually print their own tokens which will later be stored in the system. For example, such as the Compound protocol which has a COMP token. Or like in the new Defi project, Tadpole Finance which has TAD tokens.
Benefits and Risks of Yield Farming
The benefit is getting profit. If the tokens obtained are sold or used again for trading at the right time, then you can get more profit.
Speaking of risks, Yield Farming players often experience bugs that make them vulnerable to hacks or attacks.
Potentials and Challenges of Yield Farming
Most of the current DeFi applications are based on the Ethereum blockchain. As we know, Ethereum 2.0 will be launched at the end of 2020. Of course, with the launch of this network, the DeFi ecosystem will be increasingly used. Because the developers who take advantage of DeFi no longer encounter the obstacles they have encountered so far. Of course, this will also have a good impact on the world of Yield Farming which is part of DeFi.
However, in 2020, Ethereum is still in the process of improving itself or is still in the process. Obviously, this creates some challenges in Yield Farming. Later, as Yield Farming becomes more popular, it will increase the number of transactions on the Ethereum network, which results in slow confirmation times and soaring transaction fees.
So, that was the explanation about Yield Farming in the DeFi ecosystem.
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