Yield Farming Explained

Let’s start with the basics

What is Yield Farming?

Yield Farming can be very roughly summed up as: The process of lending your cryptocurrency via the Binance Smart Chain (BSC), in this case, as liquidity to an underlying protocol which gives you a return in the form of yield or interest.

It’s like taking a loan from a banking institution (liquidity provider in this case) who is expecting to be paid back with interest. They are terms to these loans and requirements that must be met. Similarly, anyone interacting with these various defi contracts will have to follow specific rules and guidelines set out by that project.

Now let’s break down yield farming a bit more.

In yield farming you are the liquidity provider who is being paid in either a fixed or variable interest in these yield farms. This is all done in a trustless fashion using smart contracts on BSC with the added convenience of low transaction fees.

How do you practically earn yield?

Step 1

One of the first steps to earning yield is to put your liquidity into a liquidity pool which is essentially a smart contract where users can borrow, lend and exchange tokens.

Step 2

Once you’ve completed this step you can now officially call yourself a liquidity provider/yield farmer. You are paid out either a fixed or variable interest rate based on the Daily APR (Daily Average Percentage Return) of the pool you are staked in.

Let’s Recap

By locking up your funds in this liquidity pool through the underlying defi project via a smart contract, this is not to be confused with simple staking in a proof of stake protocol. Your assets are actively used by other participants who may borrow them within the underlying protocol, use them to arbitrage trade in a trading bot or to actively secure a new network with unique tokenomics etc. You as the liquidity provider is in a potentially powerful financial stance, as your capital is actively and literally working for you while you sleep. Remember crypto is a 24/7 market so the possibilities are endless.

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