Yield Farming: the saver in bear market

Yield Farming: the saver in bear market

Yield farming is a method of using the decentralized financial system (DeFi) to increase yields. Customers lend or borrow cryptocurrency through a DeFi platform and then earn crypto as a reward in exchange for their services. You can develop your defi  platform with the help of top custom software development companies.

Yield farmers looking to increase the yield they produce may employ more complicated strategies. For instance, yield farmers could transfer their cryptos across multiple loan platforms to maximize their earnings.

What is the yield of farming?

Yield farming lets investors make money by placing coins or tokens into a decentralized application, also known as an app. Examples of dApps are cryptocurrency wallets, DEXs, decentralized social networks, and much more.

Yield farmers typically utilize Decentralized Exchanges (DEXs) for lending or borrowing money or even stake coins to make money and profit from price movements. Yield farming on DeFi is possible through smart contracts, which are top custom software development companies that automatizes financial contracts signed between two or three people.

Different types of yield agriculture:

• The liquidity provider, The users, deposit two coins into a DEX to offer trading liquidity. Exchanges charge a fee for exchanging the two tokens, which are transferred to the liquidity providers. This fee may be transferred into fresh liquid pool (LP) tokens.

• Lend: Tokens or coin holders can loan crypto to borrowers via an intelligent contract. They gain interest for the loans.

• Borrowing farmers can borrow one token as collateral to get a loan from another. The farmer can then harvest the yield by borrowing the coins. This means that the farmer will keep their initial investment and could see it grow in value as time passes while making money on borrowed coins.

• Staking: There are two kinds of staking available on the market of DeFi. The most common form is the proof-of-stake blockchains, in which users are compensated with interest in exchange for the pledge of their tokens onto the blockchain to ensure security. Another option involves staking LP tokens earned by providing the DEX, which has liquidity. This lets users gain yield twice as they receive compensation for providing 

liquidity by LP tokens that they can later stake to earn a higher yield.

Calculating the yield of farming returns

Expected yield returns are generally annually calculated. The future yields are calculated in the span of a calendar year.

Two commonly used measurements include annual percentage rates (APR) as well as the annual percentage yield (APY). APR does not take into account compounding -- investing profits in yielding higher returns, but APY does.

Be aware that these two measures are simply projections and estimations. Even the short-term benefits are hard to forecast accurately. Why? Yield farming is an extremely competitive and fast-paced business with rapid changes in incentives.

Since APR, as well as APY, are outdated market metrics, DeFi will have to make its own profit calculations. Daily or even weekly expected returns might be more appropriate due to the speed at which DeFi operates.

Common yield farming practices

Curve Finance

The Curve is the biggest DeFi platform by value locked, having nearly $19 billion in value locked. Utilizing its own market-making algorithm, Curve Finance platform makes greater use of funds locked than any other DeFi platform developed by top software development firms -- which is beneficial for swappers as well as liquidity suppliers.

The Curve has a broad selection of stablecoins with high APRs that are tied by fiat money. Curve maintains its APRs at a high level that ranges between 1.9 percent (for the liquid tokens) to 32 percent. If the tokens do not lose their pegs in the stablecoin pool, they are secure. The risk of permanent loss can be completely prevented since their cost are not drastically different when compared to one another. Curve, just like all DEXs, is subject to the threat of loss for a short period and failure of smart contracts.

The Curve is also a token with its own CRV, which is used to govern it to manage the Curve DAO.

Uniswap

Uniswap is a DEX system that allows exchanging tokens without trust. The liquidity providers invest an amount equivalent to two tokens to form a market. The market allows traders to trade against the pool of liquidity. In exchange for providing the liquidity needed, these liquidity companies earn fees for trades that take place within their pool.

Due to its non-frictional design, Uniswap has become one of the most well-known platforms for token swaps that are safe and secure. This is beneficial for high-yield agriculture systems. Uniswap additionally has its own DAO governance token called UNI, was created by biggest software development companies.

PancakeSwap

PancakeSwap operates in a similar way to Uniswap However, PancakeSwap runs on the Binance Smart Chain (BSC) network rather than on Ethereum developed by Best Software Developers. Additionally, it has extra features that focus on gamification. BSC token exchanges and interest-earning Staking Pools, NFTs, non-fungible tokens (NFTs), as well as a betting game that lets players predict the price to come for Binance Coin (BNB). All of these are on PancakeSwap and was developed by biggest software development companies.

PancakeSwap is susceptible to the same risks similar to Uniswap, like short-term losses due to massive price fluctuations or malfunctioning smart contracts develop by Best Software Developers. A majority of the tokens that are part of PancakeSwap pools have low market capitalizations that put them at risk of the possibility of a temporary loss.

PancakeSwap is a token, CAKE, that can be used to access the platform. The top custom software development companies can develop the same platform. It can also be used to vote on ideas on behalf of the platform.

Risks associated with yield farming

The practice of yield farming can be a tangled procedure that exposes both the borrower and lenders to financial risks. In times of volatility and volatile, yield farmers are at risk. Possibility of temporary losses and price fluctuations. The risks of yield farming include:

Rug pulls

Rug Pulls are an exit scam where an investor-funded cryptocurrency Best Software Developers takes money for a project and then decides to stop the project without remunerating the money to investors. Rug pulls, along with other exit scams, that farmers who produce yields are most susceptible to, were responsible for approximately 99% of major fraud in the second quarter of 2020, as per the CipherTrace study.

Risks posed by regulation

The regulation of cryptocurrency is still encased in doubt. It is believed that the Securities and Exchange Commission has stated that some cryptocurrency assets can be considered securities, bringing them under its jurisdiction and permitting it to regulate the use of these assets. State regulators have handed out cease-and-desist notices against central crypto lending websites such as BlockFi, Celsius, and others. Devi's lending and borrowing platforms could be affected in the event that it is the case that the SEC declares their securities.

Although this may be true, DeFi was created by top software development firms to be indestructible to central authorities, which includes government regulations.

Volatility

The degree of volatility is the extent to which the value of investment changes in any direction. An investment that is volatile is one with an extreme price change within a short time. As tokens are stored and their value is regulated, they could drop or increase, which can be a major risk for farmers who produce yields, especially when the market for crypto is experiencing an economic downturn.

What is permanent loss?

In periods that are volatile, liquidity providers may experience temporary losses. This happens when the value of a token within the liquidity pool fluctuates in a way that alters the proportion of tokens in the pool, thereby stabilizing the value of all its tokens.

Example:

Alice deposits 1ETH as well as 2,620 DAI (US dollar stablecoins: 1 DAI equals $1) into a liquidity pool since the price of one ETH is $2,620 (top software development companies). If the pool has three liquidity providers that have each contributed the same amount to the pool, which brings the total pool's value to 4,480 DAI and 4 ETH, which is $20,960.

Each of these liquidity providers has the right to 25 percent of the pool's funds. If they were to withdraw their funds at the current price, each would receive 2620 DAI and 1 ETH. What happens when the cost of ETH decreases?

When the cost of ETH begins to fall, it means that the traders have started selling ETH to DAI. This results in the proportion that the pool has to change so that it's heavier in ETH. Alice's portion of the pool will remain at 25 percent. However, she would now have a higher proportion of DAI to ETH. Her 25% stake in the pool will now be less than when she initially put in her money because traders were selling their ETH for less than the time Alice introduced liquidity to the pool.

It is known as an impermanent loss, as the loss only occurs when the liquidity is removed from the pool. If a liquidity service provider decides to keep their money at the end of the line, their value of the liquidity could be able to break even in the course of time. In certain instances, the costs incurred by offering liquidity can off-set temporary losses.