What is Yield Farming?

Yield farming is a newer concept than crypto staking, and it refers to the ability of one investor to carefully plan and choose what tokens to lend and on which platform. Cryptocurrency holders have the option to lend their funds, using liquidity pools, and receive a reward for their effort. Liquidity providers (LPs) deposit funds to the liquidity pool to sustain the system, and they earn a reward for it. Because of the liquidity providers who offer their funds to certain liquidity pools, other users are able to lend, borrow, and trade crypto. All crypto transactions have a service fee, which is distributed among the LPs. Besides that, all lending protocols have a native token distributed to the LPs to further incentivize liquidity pool funding. Yield Farming is a means of earning interest on your crypto, similar to how you'd earn interest on any money in your traditional savings bank account. Yield Farming operates in the same manner as bank loans do. When you borrow money from a bank, you must repay it with interest. Yield Farming works in the same way, except this time the banks are cryptocurrency holders like you.

Yield Farming vs Staking

Yield farming and crypto staking are the two main ways that cryptocurrency investors use to earn additional income. Staking has a set reward, which is expressed as an APY. Yield farming requires a well-thought investing strategy. It is not as straightforward as staking, but it can yield much greater rewards. Staking rewards are the network incentive given to validators that help the blockchain reach consensus and generate new blocks. The rewards for yield farming are determined by the liquidity pool and can fluctuate as the token’s price changes. There is no impermanent loss if you stake crypto. Yield farmers are exposed to some risks that occur due to the volatile price of digital assets. Impermanent loss can occur when your funds are locked in a liquidity pool and the ratio of the tokens in the pool is uneven. Different blockchain networks require users to stake their funds for a fixed period of time. Some also have a minimum amount requirement. Yield farming doesn’t require users to lock up their funds for a fixed period of time. Yield farming can be much more confusing for new crypto investors and may require more time and research on a daily basis. Staking crypto generates fewer rewards, but it doesn’t require the permanent attention of an investor, and some funds can be locked for longer periods of time. Calculating the best ROI between yield farming and staking might incline users towards yield farming. However, In the end, it all comes down to the kind of investor you want to be and how experienced you are with the DeFi space.

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