There is a complexity in the world of DeFi, but many of us have learned the possible ways to generate income from cryptocurrency. DeFi is the digital world’s future and will stay for sure. Roughly 1.9 billion dollars are locked up in all DeFi protocols, and the crypto owners are adding high values to DeFi applications.
Now, we need to know what yield farming in DeFi is? Long story short, it is a practice in the DeFi crypto world. Yield farming is a well-known trend in Decentralized Finance. This practice is for gaining financial incentives by utilizing your funds to have liquidity for crypto assets.
Yield Farming Introduction
Yield farming is the practice of maximizing returns through decentralized finance (DeFi). DeFi platform allows users to borrow cryptocurrency and exchange their services with cryptocurrencies.
More advanced strategies can be used by yield farmers who aim to boost their yield output. Yield farmers, for example, can continually shift their cryptos between several loan platforms to maximize their profits.
A few quick facts:
- The process of token holders maximizing rewards across numerous DeFi platforms is known as yield farming.
- Yield farmers give liquidity to various token pairs in exchange for cryptocurrency rewards.
- Aave, Curve Finance, Uniswap, and other high-yield farming methods are only a few examples.
- Due to market fluctuation, rug pulls, smart contract hacking, and other factors, yield farming can be risky.
With yield farming, investors put coins and tokens in dApps like crypto wallet and DEX to earn yields. They can find the earning values with the crypto yield farming calculator. Yield farmers earn interest by using decentralized exchanges to borrow or stake coins. They can also speculate on the price swings by facilitating smart contracts.
Yield Farming Types:
Liquidity provider: Investors provide trading liquidity by depositing two coins to a decentralized exchange. This DEX charges a small fee to interchange the two paid tokens. This fee is paid as a new liquidity pool token.
Lending: The person holding any coin or token earns yield from the interest paid on loan by lending crypto to borrowers with a smart contract.
Borrowing: Farmers can use one token as security for a second token loan. The farmers can keep their initial investment, which may arise in value over time, while also earning interest on the borrowed coins.
Staking: There are two staking forms in the DeFi world. Proof-of-stake blockchains hold the first form that allows users to pay interest to pledge their tokens to a network by providing security. Another form is to stake liquidity pool tokens farmers earn by supplying liquidity to a DEX.
DeFi Yield Farming Working Process
Yield farming or liquidity farming allows investors to do coin staking by depositing them into a lending protocol through a dApp. Within dApp, other investors can borrow the coins for speculation to anticipate the coin’s market price.
Yield farming’s entire setup consists of three components with a role in facilitating the yield farming process. These components are liquidity provider, liquidity pool, and automated market maker. Further, the yield farming process is explained in four parts. These are:
Money Deposition In Liquidity Pools
Individuals who provide liquidity deposit their money in the liquidity pool, a smart contract to lock the money. After money deposition in smart contracts makes money accessible to the liquidity pool participants.
Whether to buy, sell, or trade tokens is a significant choice.
Users decide whether to buy, sell, or trade the tokens in the liquidity pool when money becomes available in the pool. Participants can use a crypto yield farming calculator to adjust and pay a charge to the protocol depending on their chosen process. This charge is paid to liquidity providers in proportion to the share they invest in the protocol.
Getting the Prizes
The users receive farming rewards for their willingness to lend money to the protocol in the third step of yield farming. Participants are rewarded based on how much money they contribute to the liquidity pool.
Farming Pays Off Once More
The reward gainers lock their rewards back into the liquidity pool. They’ll keep doing it until they have most of their investment assets. Farmers are rewarded with local tokens as a form of payment. As a result, they can farm their rewards across multiple platforms and diversify their cryptocurrency holdings.
Farming Rewards Earnings
The liquidity pool’s investors can earn farming rewards in three different categories. These include token rewards, revenue from translation fees, and a rise in the capital. Let’s take a closer look at each of these perks.
Prizes in the form of tokens
Token rewards in the form of governance tokens are awarded to the investors. This is done to suggest pool liquidity. These tokens can be traded on crypto exchanges or farmed again in the liquidity pool by investors.
Revenue from Transaction Fees
According to the protocol, users must pay a fee to participate in the liquidity pool. At the end of the farming term, the investors receive this fee as farming incentives.
An increase in capital
The value of the tokens on the decentralized exchanges increases, resulting in a capital gain for the investors. However, there is an equal danger of capital loss or decline. As a result, investors must be very strategic about selling their stock.
Calculate Yield Farming Returns With Crypto Yield Farming Calculator
Yield farming profitability is often measured annually with a crypto yield farming calculator, implying that the total return throughout a year is used to determine a platform’s profit rates. There are two classic measures used to track the success of the DeFi platform:
- Annual Percentage Rate (APR)
- Annual Percentage Yield (APY)
Both measurements track the performance of a particular financial asset, while APY can also be used to track compounding. Compounding is reinvesting a profit or return from one investment into another, resulting in increased profits or returns.
Since smart contracts are used, reinvesting profits or returns on investment is more common in yield farming than in other marketplaces. Numerous complex trading techniques are created to maximize an investor’s potential earnings, including several exchanges and reinvestments.
It should be mentioned, however, that this sort of investment is a technical procedure, including the use of sound trading tactics. Traders aim to utilize their secret tactics to boost their annual profits in a competitive market. As previously stated, while simple staking processes can produce up to a 10% yearly return, yield farmers can generate more than 50% annually by employing intricate trading strategies.
Yield Farming Tax Calculators
When it comes to calculating taxes, you can never be too careful, and you should use a crypto yield farming calculator that is tailored to your needs, depending on the sort of investments you make. After all, not all Tax Calculators are created equal, and some are even restricted to specific regions.
TokenTax: TokenTax is a robust set of services that enable productivity gains and losses from Cryptocurrencies as straightforwardly as possible. The most admirable element is that it works in any country, not just bitcoin, although it lacks a complete portfolio tracker.
CoinTracker: A simple dashboard that automatically syncs your account transactions and calculates your taxes — CoinTracker handles the heavy lifting for you.
Crypto.com: Crypto.com’s Tax Calculator is already a fan favorite of its users. Currently available for limited jurisdictions and boasts a user-friendly interface that supports popular exchanges and wallets. It’s free for all crypto owners regardless if they have an account on Crypto.com’s exchange.
How Yield Farmers Generate Revenue
Yield Farming Revenue is divided into three categories in the farming ecosystem. These are:
Token Prizes: These are similar to inducements to suggest liquidity. The coins are delivered over a period of time, ranging from weeks to years. DEX and exchange services such as Binance and Coinbase allow users to trade cryptocurrency. The use of these tokens is intended to govern a system.
Transaction Free Revenue: The commission proposed by the participant during pool development ranges from 0.003% to 15%. This is one of the pool’s unique pricing. Others levy a 0.02 percent fee. All fees are paid to market makers. Owners of governance coins will most likely receive a portion of the revenues.
Capital Raise: An increase in money aids in generating revenue for any high-yield farming opportunity. To avoid volatility, it’s vital to use the right strategies that work with stablecoins.
Is Yield Farming Providing Benefits?
Without any doubt, yes. Yield farming benefits the liquidity providers; else, no one would invest their time in it. Even some liquidity pools have APYs in the double digits, and some have APYs in the thousands of percent of farming rewards.
However, investors should not be fooled by the large profit margins offered by yield farming. Because in addition to the enormous potential for profit, yield farming can also come with several hazards, such as gas fee risks, temporary losses, strategy risks, etc. As a result, yield farming may require additional time and concern about losing money and selecting the best farming platform.
All Things Considered,
DeFi has been booming recently, and an excellent way to profit from this sector is to engage in Yield Farming. While some returns may be low, there is always a DeFi protocol offering a higher return but with higher risks.
Suffescom Solutions provides the best DeFi-based yield farming services in the industry. Our DeFi experts give the finest solutions to start your yield farming platforms or even incorporate DeFi-based yield farming protocols into your existing platform, based on a complete grasp of DeFi Yield Farming.
Hopefully, you learned about Yield Farming and how to calculate the earnings or tax cost. If you want to know more about DeFi Yield Farming, connect with our experts or schedule a call to discuss your business needs.