One of the hot topics in the space of DeFi and crypto is the area of yield farming which is essentially the different ways that money can be earned on being invested in this space. Yield farming is essentially the different ways investors choose to put their money to work and yes, there are different methods of doing this.
The following video from Whiteboard Crypto (one of the best crypto/DeFi educators online), we take a look at these different methods. Hopefully, you can gain some insight from this video and our run through of what he's explained below that.
Yield Farming Options
There are a number of ways to yield farm which include the following:
This first example sees you lending out your tokens of say $500 Ethereum and $500 Attention token into a liquidity pool on UniSwap. If there was $100k there then you own 1% of this. If $1 million is traded back and forth between UniSwap and Ethereum and the fee is 0.3%, of the $30k earned that day in interest, you would get $30 for that day.
Borrowing and Lending
Some services like Compound and Aave give rewards for lending on their app with some coins gettin upwards of 30% APR on the app.
In the case of borrowing, this allows you to lend your coins as collateral (as you don't want to cash this out just yet) and swap for another token like DAI. The uinque thing here is that these loans are always over-collateralised so you always have to provide more tokens than what you have. This is okay if you have Ethereum and think it's going to go up. You borrow your DAI and when you eventually pay that back to get your original Ethereum, hopefully Ethereum has gone up. This is like a second mortgage on a house.
They call this lending with steroid. In this example you take what you can lend and borrow and continue to put that to work or borrow what you can get and convert back and lend it out and keep repeating this process. For example, if you deposit Attention token on Aave of $100 to get back $60 DAI and then resupply that back to Aave to get $36 DAI and repeat the process. You can end up earning 30% APR on $200 of assets.
Risks here include that if Attention token price falls you can get liquidated to cover the lenders funds.
Another form of yield farming. In this case is that you would buy coins, stake them to earn more free coins. An example of this is Tezos which has a 6% APR but need a staking node that will be reliable throughout the year. Another option is to do via Coinbase which takes a cut for doing this.
Ethereum 2.0 moves to a new model to earn Ethereum where there is a move from Proof of Work to Proof of Stake. Instead of a bunch of miners doing work to mine Ethereum, it will be 1 miner at a time to validate the blocks.
Staking LP tokens
These are tokens you get for providing liquidity. You get ETH, BAT, UniSwap tokens. These platforms allow you to stake these tokens to earn more interest so you do not remove liquidity. The risk here is that these are deflationary. Many don’t go for a liquidity pool token as this could go to zero as they produce more and more.
Holdings coins with distribution fees
Another is to hold tokens that have redistribution fee. E.g. Safemoon has a 10% transaction fee where half of this is redistributed to all token holders and other half is burnt. Deflationary risks as well
Like any investment, nothing is guaranteed so it's important to be aware of risks such as
Impermanent loss Rug pulls.
It's important for new investors to do their homework with new types of investing like this, especially as the space is new and being figured out. The great thing we find with all of this is how open and transparent the hindustry is as a whole where learning is not restricted and is available to those who want to put in the time to do so.
Good luck out there!