What is Yield Farming? Earn Passive Income with Crypto

Sign up for free online courses covering the most important core topics in the crypto universe and earn your on-chain certificate – demonstrating your new knowledge of major Web3 topics. Yield farming is important as it can help projects gain initial liquidity, but it is also useful for both lenders and borrowers. I’m a technical defi yield farming development writer and marketer who has been in crypto since 2017.

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• It’s at the discretion of each individual investor to identify if the rewards are worth the current risks when it comes to finding the best yield farming platforms and methods.
• Before you can start earning yield on your cryptos you need to get a software wallet like MetaMask (or a hardware wallet supported by the platform you want to use).
• If you want to earn by using some of the decentralized finance (DeFi) best yield farming platforms, then it’s important to know exactly how some of the yield farming methods work.
• So depending on how much Crypto.com Coin (CRO) you’ll stake, the holding term you’re using, and which cryptocurrency you’re using to yield farm, the APY will vary..
• Uniswap works through liquidity pools, where users can deposit funds to provide liquidity for those that want to swap between tokens.
• To engage in yield farming, you’ll need to connect your digital wallet to the DeFi platform of your choice, deposit necessary assets, and follow the platform-specific instructions.

With a simplistic, easy-to-use interface as well as accessible payment options, new crypto investors will benefit greatly from Coinbase. Next atop our list  is eToro, an all-in-one trading platform with several cryptocurrency products. One of eToro’s latest features, Crypto Staking, is a form of yield farming where particular cryptocurrencies are used to validate transactions. By either providing liquidity or holding coins that have redistribution fees, you can earn reward coins as a form https://www.xcritical.com/ of yield farming. This is important to understand when finding some of the best platforms for yield farming since it can dictate your compounded earnings. Yearn.finance is a prominent DeFi platform that offers yield farming pools.

DeFi protocols — Smart contract risk

It also has pools for automated market makers with higher liquidity and anonymity. Compound is an algorithmic money market that allows users to lend and borrow assets. Anyone with an Ethereum wallet can contribute assets to Compound’s liquidity pool and earn rewards that begin compounding immediately. Yield farmers may use a liquidity pool to earn yield and then deposit earned yield to other liquidity pools to earn rewards there, and so on.

Uniswap — The leading decentralized exchange

In the event that assets are stolen, a $30 million policy is in place to cover the losses from theft. Let’s go through some of the terms and key ideas that will give you a better grasp of yield farming crypto. However, there are also risks involved, and thus one must be cautious.

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For each Vault that’s available, you can see the list of strategies it is using to earn yield, alongside a risk score for each strategy. This is a very welcome feature as it allows users to know exactly what their deposited tokens will be used for. While some platforms require you to manually claim your rewards, some of the best crypto yield farming platforms do this automatically. Note that because APY is compounded, meaning rewards are added to the principal amount depending on the distribution frequency.

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These projects often raise huge amounts in a short period of time and are then forgotten about. Some have even been described as scams—especially the flash farming projects. Those who are making huge returns often have a lot of capital behind them.

Aave — The leading decentralized liquidity protocol

Let’s say an investor owns coins like ether (ETH) or stablecoins like DAI. Instead of letting these assets sit idle in their crypto wallet, they can put their coins to work by lending or depositing them on various DeFi platforms. These DeFi platforms can be decentralized exchanges (DEX), lending and borrowing platforms, yield aggregators, liquidity protocols, or options and derivatives protocols. According to DeFiPulse, a DeFi analytics and ranking platform, Decentralized finance protocols have over $50 billion worth of crypto locked in these programs. There are multiple types of yield farming projects offering different financial services, mostly to earn astonishingly high interest.

How do you earn yield on crypto?

Another is selling stock options, a way to earn money on stocks you own by lending them to others. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. Our partners cannot pay us to guarantee favorable reviews of their products or services.

Furthermore, the OKX DEX also ensures privacy without requiring personal information or KYC from the users. It also excels in  yield farming with support to 350+ tokens and diverse yield farming pools. If you’re interested in maximizing your crypto investments, yield farming is a recommended option for you. It allows anyone to lock up (stake) Synthetix Network Token (SNX) or ETH as collateral and mint synthetic assets against it. Synthetic assets can be thought of as tokenized derivatives that use blockchain technology to replicate the value of their underlying assets. As such, they provide an accessible way to hold and trade assets without actually owning them.

Soon after, other DeFi protocols like Uniswap, Aave, and Sushiswap followed suit, making yield farming a cornerstone of the DeFi landscape. The risk of impermanent loss is lower if you are providing liquidity for assets that tend to stay in a limited price range. If you want to earn by using some of the decentralized finance (DeFi) best yield farming platforms, then it’s important to know exactly how some of the yield farming methods work.

This lack of liquidity means that a user may not be unable to access or withdraw their funds immediately as and when they need to. Staking involves locking up a certain amount of coins in a blockchain to help support the security and operation of a blockchain network. By staking their tokens, users are often rewarded with additional coins as an incentive.

As for borrowing, you can earn a lot through leveraged yield farming platforms that let you borrow crypto which you can then invest in and earn substantially when the price rises. However, since you’ll be handing out your cryptocurrencies to these exchanges, you relieve a lot of control over those crypto assets. Maker is a decentralized credit platform that supports the creation of DAI, a stablecoin algorithmically pegged to the value of USD. Anyone can open a Maker Vault where they lock collateral assets, such as ETH, BAT, USDC, or WBTC. They can generate DAI as a debt against the collateral they have locked. This debt accrues interest over time, called the stability fee, at the rate set by Maker’s MKR token holders.

Alternatively, the protocol will grant LP tokens – a token representing a user’s share in the liquidity pool. LP tokens are ERC-20 tokens and are held in the wallet of the contributor, which means that they can be actively used on other DeFi protocols. The end result is that one can maximize his profits by farming existing crypto assets and farming new LP tokens as well. Reward tokens themselves can also be deposited in liquidity pools, and it’s common practice for people to shift their funds between different protocols to chase higher yields. There are many approaches to yield farming, but the common starting point is depositing crypto you already own into a decentralized finance platform that promises returns or yield.

The product supports a large number of different cryptocurrencies and provides both flexible and locked options. Yearn.finance is a DeFi protocol that rose to prominence in 2020, when the concept of yield farming started gaining a lot of traction. The basic concept behind Yearn.finance is that it gives users easy access to different DeFi protocols in order to help them maximize yield. Earning passive income with cryptocurrency is a goal of many crypto investors.

Getting involved in yield farming is tricky if you have no previous experience in the crypto world. Projects like Compound and yearn.finance are working to make the world of borrowing and lending accessible to all. Currently, yield farming can provide more lucrative interest than a traditional bank, but there are of course risks involved too.