What is Yield Farming and How Does It Profit?

Esat Demirtaş 21 December 2021Last Updated: 16 April 2023

4 minutes read

What is Yield Farming and How Does It Profit?

After the concept of DeFi, which means decentralized finance, entered our lives with the crypto world, one of the most asked questions of the last period has been the question of what is Yield Farming.

With the answer to the question of what is Yield Farming, one of the passive income sources of the crypto world, we will try to convey all the details about Yield Farming in this content.

Contents

What is Yield Farming?

Yield Farming is an income model that offers the opportunity to earn passive income by lending in the DeFi system.

With the introduction of DeFi, that is, the concept of decentralized finance, in the Yield Farming model, which is one of the adaptations of traditional finance and earnings models in the crypto world, there is the opportunity to earn with owned crypto assets.

To put it more clearly; if you own a certain amount of a crypto asset and you can lend the crypto asset you own for a certain percentage fee, you will earn income on the total amount of assets.

So Yield Farming; while it means Earnings Farming, it is mostly called by the users with its original name or with concepts such as Liquidity Mining. Some users also use the term YF using the first letters of the words Yield Farming directly.

How Yield Farming Works?

To understand how the Yield Farming system works, we can explain through an example.

Let’s say you have 100 of a certain cryptocurrency or token and you intend to hold this crypto asset for the long term.

By keeping the amount of crypto money or tokens in your hand on a crypto exchange or platform that provides Yield Farming service, you can set a percentage profit in the allowed range and allow someone else to use it within the specified period, and thus you will earn on the amount of debt you have used.

Here’s how Yield Farming works:

The total assets owned are added to the pool of the crypto exchange or DeFi platform where Yield Farming will be held.
Cryptocurrencies or tokens added to the pool are locked and cannot be traded for a certain period of time.
In exchange for the asset, the native token of that exchange or DeFi platform is owned.
When the minimum time required to be kept in the pool is completed, a reward is earned from the same crypto asset at a determined percentage.

What is the Difference Between Yield Farming and Staking?

After learning the working logic of the Yield Farming system, the first question that probably comes to mind is what is the difference between Yield Farming and Staking.

Yield Farming and Staking are two completely separate processes, although there are significant similarities between them.

It is necessary to keep the assets owned in the staking system in a crypto wallet and for a certain period of time. In Yield Farming, the assets owned must be kept in the pool on the crypto exchange or DeFi platform, not in a crypto wallet, and the local token unit of the platform where that pool is located must be taken.

What are Yield Farming Advantages and Disadvantages?

Although Yield Farming sounds very attractive, many people wonder what the advantages and disadvantages of the Yield Farming system are.

As in the traditional financial system, each transaction has its own advantages and disadvantages in the DeFi system, as well as Yield Farming’s advantages and disadvantages.

Yield Farming Advantages

We can talk about the advantages of the Yield Farming system as follows:

It is a revenue model that does not require constant monitoring and analysis like trading.
It is a lending system and there is no risk of not being able to repay the loan given because trust is provided by the over-collateralization method called over-collateralization.
It is one of the most comfortable passive income models if it is included in sensible and robust DeFi platforms.
As long as the Yield Farming platform or crypto-asset is sound, there is no risk of loss.
With the Yield Farming calculation, the amount to be earned can be determined in advance.

Yield Farming Disadvantages

We can talk about the disadvantages of the Yield Farming system as follows:

Yield Farming is a system that is more suitable for whales, that is, those who have a large amount of crypto assets.
There is no chance of intervention if the price of the relevant cryptocurrency or token falls during the process of lending the owned asset.
Although it is very easy to explain, advanced knowledge is required for Yield Farming.
There is also the risk of losing the crypto asset in the face of errors or attacks that will occur on the Yield Farming platform.

How to Calculate Yield Farming?

Since Yield Farming calculation varies according to the platform where the transaction will be made, it is not possible to talk about a fixed calculation.

Each platform that provides a Yield Farming system has its own rates, rules, times and calculation systems. The most preferred platforms for Yield Farming are:

Whichever of the above platforms is preferred, you can go to the Farm or Yield Farm page of that platform to get information about which crypto assets, at what rates and under what conditions, as well as to clearly determine the profit that can be obtained.

Yield Farming continues to attract investors day by day with the new understanding that the DeFi system adds to the financial sector.

What is Yield Farming and How Does It Profit?