If you want to take your DeFi investment strategy to the next level, you need to understand yield farming and what platforms offer the best rewards. Yield farming has become a common feature in the market as of late. However, as with any new technology, you need to DYOR (do your own research) to discover what platforms offer the best ROIs.
What Is Yield Farming
You can think of yield farming as the evolution of staking. It used to be that users would only stake their cryptocurrency when validating transactions on Proof-of-Stake networks. Soon, this strategy evolved into other forms of staking, such as liquidity pools and farming. Nowadays, there are many reasons for a user to stake their crypto. One of the most popular reasons is yield farming.
Yield Farming vs. Staking
You often hear the terms staking and farming used interchangeably. Notably, this is incorrect. The critical difference between staking and yield farming is the APY and lock-up periods. Yield farming produces a lower APY than staking your crypto on most platforms. However, staking pools require a much longer lockup than yield farming. In most instances, farmers have short lockup requirements, if any. For this reason, it’s common for farming protocols to introduce some form of early withdrawal penalty to prevent users from instantly dumping their farming pool tokens.
How Yield Farming Works
Yield farming functions similarly to staking your crypto. Specifically, you will need to agree to some form of lockup and deposit your cryptocurrency into a farming pool. These funds are then available for new projects or other users, depending on the platform. Notably, you receive rewards for farming in pool tokens. Pool tokens can go up in value as more liquidity enters the farming protocol. Consequently, you can earn extra ROIs when this occurs.
There are a couple of different types of yield farming protocols in the market currently. The most popular form of farming is decentralized lending. In this scenario, you agree to lock your funding in a farming pool that other users can then borrow against.
These short-term loans are repaid with interest. This repayment feeds back into the pool, increasing its liquidity even more. In turn, the pool’s tokens rise in value. Keenly, these systems merge all users’ funds in the farming pool. This strategy guarantees that lenders receive their loan repayments on time, regardless of if the borrower fulfilled their responsibilities.
Benefits of Yield Farming
Yield farming is so popular because it introduces significant benefits to the market. For one, it’s straightforward to do. You don’t need any technical understanding in most scenarios. For this reason, it’s much safer than trading for new users. Besides researching the merits of the platform you intend to trade on, you just need to understand the lockup period and rewards.
Since there are fewer risks and overall dependence on investor’s actions, yield farming provides more consistent rewards to investors versus trading. Additionally, yield farming has proven to offer higher ROIs for new users when compared to trading. Why spend weeks attempting to learn trading strategies when you can simply farm your crypto and start earning rewards today.
Risks of Yield Farming
It’s important to mention that yield farming is not perfect. There are some risks that users should be aware of before they participate in these networks. For one, you need to beware of scamsters promising impossible payouts. If the ROI sounds too good to be true, it is.
Reversely, you also need to be aware of rug pulls. A rug pull occurs when a firm removes all of its liquidity from a pool without notifying users prior. Sadly, rug pulls are all too common in the market and leave investors holding the bag.
Inflation is the most significant risk facing yield farming platforms at this time. Inflationary threats are imminent in the market because of how farming pools work. Remember, every time someone adds liquidity to the pool, more tokens get issued. The problem here is that these token issuances have started to skew the supply and demand balance. In turn, these issuances negatively affect the market value of these tokens.
DYP Introduces a Deflationary DeFi Protocol
DeFi Yield Protocol developers may have found the best way to combat yield farming’s biggest foe with its new deflationary governance structure. Unlike the competition, DYP integrated various deflationary protocols to help maintain token values.
For example, the network automatically converts DYP tokens to ETH daily. This strategy reduces the supply of DYP and strengthens its value. Additionally, DYP is the first DeFi platform to allow you to stake DeFi tokens and get your rewards paid out in ETH. Both of these systems aim to reduce DYPs in circulation and bolster the network’s underlying blockchain, Ethereum.
DYP Yield Farming
DYP supports a selection of farming pools currently. There are automated yield farming contracts for DYP/ETH, DYP/USDC, DYP/USDT, and DYP/WBTC. Best of all, your farming fees go back to the community because they are fed into the liquidity pools.
DYP Token Use
The DYP token plays a vital role in the network. This token functions as the primary governance token. Users can vote on pressing network issues when they hold DYP tokens. The more DYP you own, the more weight you have in the approval or denial of network upgrades, added pools, or fee alterations.
Every day following the completion of DYP’s deflationary protocol, the community must decide what to do with un-converted DYP tokens. Community members vote on whether to burn these tokens or to redistribute them via the liquidity pools. In this way, DYP users have more say in the network’s direction and the project’s token value.
DYP – Not All Yield Farming Is Equal
DYP takes the cake in terms of ease of use and community involvement. Their deflationary governance model is first in the market. If successful, you can expect this form of deflationary governance model to see widespread usage moving forward. For now, DYP users enjoy healthy ROIs thanks to their ability to protect the project’s token value.