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Category: Cryptocurrency Basics
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What exactly is Yield Farming?
What exactly is Yield Farming?
The most discussed topic at Defi Summer 2020 was yield farming.
The overall value of locked liquidity pools is likely to hit new highs in 2021. What exactly is yield farming, how does it work, and where can you do it?
Yield farming is the activity of using or leasing cryptocurrency assets in order to generate large returns or rewards in the form of additional cryptocurrency.
This novel, but dangerous and unexpected, use of decentralised finance (Defi) has lately gained traction as a result of other findings, such as liquidity mining. Yield farming has emerged as the most important development engine in the fledgling Defi sector, which is predicted to grow from $500 million to $10 billion by 2020.
In a nutshell, yield farming strategies encourage liquidity providers (LPs) to contribute or lock their crypto assets in a smart-contract-based liquidity pool.
These incentives may take the form of a percentage of transaction fees, loan interest, or a governance token. These findings are expressed as a percentage yield each year (APY).
The value of the supplied returns lowers as more investors add funds to the related liquidity pool.
Most yield holders initially relied on the well-known stablecoins USDT, DAI, and USDC. The most widely used Defi protocols, on the other hand, run on the Ethereum network and award governance tokens for so-called liquidity mining.
Tokens are farmed in these liquidity pools in exchange for liquidity to decentralised exchanges (DEXs).
Liquidity mining occurs when a Yield Farming member receives token rewards as additional remuneration. It gained traction after Compound began issuing the increasing COMP, the platform’s governance token, to users.
Most yield farming systems now compensate liquidity providers with governance tokens, which may be traded on a number of marketplaces, including the decentralised Binance and Uniswap.
What exactly is APY in yield farming?
Yield farming, as well as the vast majority of protocols and platforms, calculate returns in terms of annual percentage yield (APY). The annual percentage yield (APY) is the return on investment over the course of a year. The APY comprises compound interest, which is calculated and applied on a regular basis to the amount.
Since the Defi summer of 2020, yield hunters have been chasing amazing thousand-per cent APYs. These logs and coins, on the other hand, can be extremely harmful and prone to outliers.
Furthermore, the income is earned in log tokens, which are subject to highly volatile price fluctuations.
The 10 most popular yield farming protocols
Yield farmers usually use many Defi systems to maximise the return on their investment. These systems offer a variety of incentive-based lending and liquidity pool borrowing options. The following are seven of the most commonly used yield farming techniques:
Aave is an open-source, non-pledged, decentralised lending and borrowing protocol that allows users to borrow assets and earn compound interest in the form of the AAVE token for lending (formerly LEND).
With almost $21 billion in TVL as of August 2021, Aave has the highest TVL of any Defi protocol. AAVE customers can earn up to 15% APR on lending.
The Compound is a lending and borrowing asset money market where you can earn algorithmically adjusted compound interest and the governance token COMP. It is audited and evaluated on a regular basis to ensure the highest level of security. The total offering (as of August 2021) is $16 billion, with APYs ranging from 0.21% to 3%.
Curve Finance is a DEX that employs a novel market-making algorithm to enable users and other decentralised protocols to exchange stablecoins for low fees and with minimal slippage.
It is the largest DEX in terms of TVL, with around $9.7 billion locked up. The base APY may be as low as 10%, while the reward APY may be as high as 40%. Stablecoin pools are generally safer because the value of their peg does not degrade.
Uniswap is a well-known DEX and AMM that allows users to exchange virtually any ERC20 token pair without the need for a third party. To obtain a percentage of transaction fees and the UNI governance token, liquidity providers must use both sides of the liquidity pool in a 50/50 split.
The current live versions are Uniswap V2 and V3. The most recent version, Uniswap V3, is a growing protocol ecosystem with over 200 integrations. The TVL for V2 is $5 billion as of August 2021, and it is more than $2 billion for V3.
Instadapp is the most advanced platform for harnessing the power of Defi in the world. Users may manage and enhance their Defi portfolio, while developers can use their platform to build Defi infrastructure. As of August 2021, more than $9.4 billion had been locked up on Instadapp.
SushiSwap is a fork of Uniswap, a coin that generated quite a stir in the cryptocurrency community during its liquidity migration process. It has matured into a Defi ecosystem with multi-chain AMM, loan and leverage markets, onchain mini dapps, and Launchpad. TVL on the platform is worth $3.55 billion as of August 2021.
PancakeSwap is a Binance Smart Chain (BSC)-based DEX that allows you to trade BEP20 tokens. PancakeSwap operates on the automated market maker (AMM) model, in which users trade against a liquidity pool.
PancakeSwap has the highest TVL among BSC protocols, at nearly $4.9 billion in TVL (as of August 2021). It focuses on gamification aspects like lotteries, team combat, and NFT collectables. The annual percentage yield (APY) can reach 400%.
The Venus Protocol is an algorithm-based money market system that aims to provide a credit-based system to the Binance Smart Chain. Borrowers pay interest while users donate collateral to the network in exchange for APY.
Venus distinguishes itself by its ability to lend other assets using market collateral and issue synthetic stablecoins with overcollateralized positions that defend the protocol.
These fake stablecoins are supported by a number of cryptocurrencies. TVL is worth more than $3.3 billion as of August 2021.
The balancer functions as a trading platform as well as an automated portfolio manager. Its liquidity mechanism enables it to be deployed in a flexible manner. It does not oblige lenders to provide equal liquidity to both pools.
Instead, liquidity providers can create individual liquidity pools with varied token ratios. As of August 2021, more than $1.8 billion had been set aside.
Yearn. Finance is a decentralised automated aggregation protocol that allows yield builders to increase yield by utilising multiple credit protocols such as Aave and Compound. Yearn. Finance uses rebasing to enhance profit by locating the highest-yielding farming services.
Yearn. Finance made waves in 2020 when its governance token, YFI, temporarily surpassed $40,000 in value. Yearn users can earn up to 80% APY, and the coin is valued at $3.4 billion.
Farming Bitcoin Yields
Most users are interested in Yield Farming for Bitcoin when it comes to crypto farming. While there are no protocols for Bitcoin Defi Yield Farming, Wrapped Bitcoin (WBTC) connects Bitcoin to the Ethereum blockchain and Defi applications.
Owners of Bitcoin can earn a few per cent returns by learning how to package Bitcoin and lend it via protocols like Compound.
Yield Farming rankings on CoinMarketCap.
Are you seeking the highest yield farming pools for various Defi protocols? Don’t bother looking any further! On CoinMarketCap, the Defi Yield Farming Rankings track liquidity pools across Defi protocols such as Venus, Curve, Sushi, Synthetix, Yearn, PancakeSwap, and others.
The crypto pair, total value locked (TVL), yield type, volatile loss, and annual percentage yield can all be viewed by yield farmers (APY).
The Risks of Yield Farming
Yield farming can be rather complicated, carrying significant financial risks to both borrowers and lenders. It usually has high Ethereum gas prices and is only worthwhile if hundreds of dollars are given.
Furthermore, when markets are volatile, users are at risk of volatility losses and price reductions. CoinMarketCap has a Yield Farming ranking page with an Impermanent Loss Calculator to assist you in identifying your risks. CoinMarketCap also has a website that tracks the values of the top Yield Farming tokens.
Most importantly, yield farming is vulnerable to hackers and scammers due to potential weaknesses in the protocols’ smart contracts. These programming errors can occur as a result of severe competition across protocols when speed is critical and new contracts and features are frequently untested, if not copied from predecessors or competitors.
The Yam protocol (which earned over $400 million in days before a severe flaw was identified) and Harvest. Finance (which lost over $20 million in a liquidity hack in October 2020) are two examples of vulnerabilities that have resulted in significant financial losses.
Defi protocols are permissionless and rely on a variety of apps to function properly. Assume one of these underlying programmes gets exploited or fails to function properly. In that instance, it may have a detrimental impact on the entire application ecosystem, culminating in a permanent loss of investor capital.
There has been an increase in risky protocols that issue so-called meme tokens with animal and fruit names, offering hundreds of dollars in returns.
These protocols should be utilised with caution because their code is largely untested, and the returns are subject to surprise liquidation due to market volatility.
Many of these liquidity pools are complex scams in which the creators drain the pool’s liquidity and disappear with the money.
Defi losses are usually irreversible and cannot be undone because the blockchain is fundamentally unchangeable.
As a result, it is advised that consumers get acquainted with the risks of yield farming and conduct their own research.
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What Is A Cryptocurrency Exchange? – Beginner’s Guide 2022
“What is a cryptocurrency exchange?” … At one point, the notion of having digital money may have seemed weird and unachievable, but with the current surge in popularity of cryptocurrencies, many have opted to own and invest in this kind of cash. If you’re new to cryptocurrency trading, you may be wondering, “What is a cryptocurrency exchange?”
What Is a Cryptocurrency Exchange?
If you’re wondering where to purchase bitcoin, you’re likely to begin your investment adventure on a cryptocurrency trading site. Cryptocurrencies exchanges are online marketplaces for the purchase and sale of cryptocurrency. These platforms act as an intermediary between buyer and seller, allowing users to exchange cryptocurrencies using fiat currency or alternative cryptocurrencies.
Due to the cheap trading fees associated with cryptocurrency exchanges, many investors prefer to use them. Bear in mind, however, that not all platforms are beginner-friendly, sometimes overwhelming users, particularly those unfamiliar with stock trading. As such, it’s critical to grasp the distinctions between each exchange platform in order to choose the one that works best for you.
Types of Cryptocurrency Exchanges
If you’re eager to purchase your first cryptocurrency, a vital first step is to familiarise yourself with the many sorts of cryptocurrency exchanges:Centralized
The most popular type of exchange platform is a centralised crypto exchange, which makes use of a third party — a middleman — to facilitate transactions. The intermediary operates as a bank, providing protection and supervision in exchange for the trust placed in them with their money. Some investors believe this idea is deceptive, as cryptocurrencies are decentralised and do not require a central authority.
Decentralized
Unlike centralised cryptocurrency exchanges, decentralised exchanges do not use an intermediary; instead, they rely on blockchain technology or distributed ledgers. This less prevalent kind of exchange eliminates the need for a third party to hold the money, and transactions are conducted peer-to-peer using smart contracts.
Notable Crypto Exchanges
With over 6,500 cryptocurrencies in existence today, there is a sizable market for crypto exchanges, with over 300 sites. Before deciding on the finest cryptocurrency trading platform for your needs, it’s critical to conduct your own study, as there are several alternatives. The following are some crypto exchange platforms that we recommend:
Binance
Binance, founded in 2017 and widely regarded as the greatest crypto trading platform, offers a list of hundreds of currencies to choose from, as well as its own wallet.
Trading fees:
- 0.1 percent spot trading fee
- 0.5 percent instant buy/sell fee
Pros - Lower fees
- Large variety of currencies
- Advanced charting
Cons - Not beginner-friendly
- Not supported by some states
- Fewer crypto-to-crypto currency pairs
Coinbase
With over 50 cryptocurrencies to trade, some believe Coinbase to be the finest cryptocurrency trading platform. Additionally, Coinbase simplifies the process of buying and selling crypto by providing high security and transparency. This is an excellent site for cryptocurrency traders who wish to earn staking incentives as well.
Trading fees:
- Coinbase: from 99 cents to $2.99
- Coinbase Pro: up to 0.5 percent
Pros - Simple user interface
- High liquidity
- Good variety of currencies
Cons - Higher fees
- No control over wallet keys
Gemini
Gemini supports over 40 cryptocurrencies and is an excellent platform for both novice and experienced traders. While Gemini has a straightforward interface, it also has upgrading features and tools for sophisticated trading. The network, which was launched in 2015, is open about its security procedures and keeps bitcoins in an offline cold storage system.
Trading fees:
- 0.5 percent convenience fee
- 99 cents to $2.99 transaction fee and 1.49 percent for trades over $200
Pros - Beginner-friendly
Strong security
Available in all U.S. states
Cons - Higher fees
Kraken
Kraken is one of the oldest platforms, having been created in 2011. It is also widely regarded as one of the top cryptocurrency exchanges. With over 60 cryptocurrencies and a high level of cybersecurity, Kraken also offers very low trading costs, making it an excellent choice for more experienced traders.
Trading fees:
- Up to 0.26 percent
Pros - Lower fees
- Strong cybersecurity
- Advanced trading features
Cons - Not beginner-friendly
KuCoin
KuCoin is also one of the largest cryptocurrency exchanges, supporting over 300 different cryptocurrencies. With a simplistic interface, KuCoin makes trading relatively easy, which is good for novices, but also has extra features that make it suitable for more experienced users.
Trading fees:
- 0.1 percent spot trading fee
- 0.5 percent instant buy/sell fee
Pros - Lower fees
- Simple to use
- Large variety of currencies
Cons - Low trading volume
Bittrex
Bittrex is an excellent site for anyone seeking for a broad selection of cryptos – it now supports over 190. Bittrex, founded in 2014, thinks that security is critical for a successful exchange platform. Additionally, it is user-friendly, making it an excellent platform for novices.
Trading fees:
- 0.25 percent flat trading fee
Pros - Beginner-friendly
- Large variety of currencies
- Secure
Cons - High fee for low volume trades
What to Look For When Picking a Cryptocurrency Exchange
At the end of the day, everyone has an opinion about the best site to acquire cryptocurrency. Whether you’ve made a selection or are still debating between a few possibilities, it’s critical to understand what to look for when selecting a cryptocurrency exchange.
Is It Convenient?
Wherever you are in the globe, you should examine the cryptocurrency exchanges that are available in your nation, as well as state restrictions. Examining the platform’s website or terms of service might assist you in determining whether it is accessible to you.
What Coins Are Available?
It may come as a surprise to learn that several cryptocurrency exchanges do not support all coins. New currencies with lower market capitalizations may be restricted to specific platforms. It’s a good idea to choose the cryptocurrencies you intend to purchase in advance and then choose an exchange that supports them.
Is There a Fee?
While some individuals choose the alternative with fewer costs, it is critical to understand why such fees are levied and how they are calculated. Occasionally, paying a larger charge provides more security and simplifies the process of transferring cryptos. You may discover that paying a greater price results in a better overall experience than paying a lesser fee.
Is It Safe?
Because one of the primary reasons for using cryptocurrency is for its security, choosing a secure platform is just as critical for keeping your money safe. Certain sites will insure your digital money against fraud or hacking. Consider additional security elements, such as a two-factor authentication system, when selecting an exchange. If you choose for a smaller exchange over a bigger one, keep in mind that younger or smaller exchanges may not have the most robust security features.
Is It Liquid?
One aspect of crypto exchanges that is sometimes ignored is their liquidity. You want to ensure that you can sell your cryptocurrency anytime and at the best price possible. This needs the exchange to have a sufficient trading volume, which is frequently the case with the most prominent crypto exchanges.
What Storage Options Are Available?
Whether you’re a newbie or have dabbled in crypto investment previously, it’s critical to consider the platform’s storage choices. While there are certain trade-offs between keeping your cryptos in your wallet and storing them on the platform, as a novice, choosing an exchange that allows you to store them in your online account is a decent choice. Simply ensure that you are permitted to withdraw them from the exchange if you subsequently desire to transfer them to your wallet.
Is It a Source of Tax Information?
As with investing in equities, any capital gains earned when trading cryptocurrencies must be reported on your taxes. Certain platforms provide Form 1099-B, which keeps account of your earnings and losses, making it easier to file taxes in the future. Because taxes may be complicated, particularly for novices, finding a platform that delivers that information can help make tax filing less stressful.
Are There Any Additional Tools Available?
With so many crypto exchanges to choose from, they will also vary in terms of the additional tools and perks they provide. Consider the platform’s functionality and appearance, as well as its ease of use and integration with your own investment monitoring software, such as the Mint app.
Bottom Line: Crypto Investing Begins With Educating Yourself
If you began this course with the question, “What is a cryptocurrency exchange?” Hopefully, you now have a better idea of what to look for when selecting a platform. However, it does not end there – investing in cryptocurrency may be a time-consuming process that requires extensive study. Because the market is always changing and learning never ends, keeping track of your money may be an excellent method to ensure a pleasant trading experience.
Sources: Investopedia | Time | BitDegree
The post What Is a Cryptocurrency Exchange? A Beginner’s Guide for 2022 appeared first on MintLife Blog.
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