If you’re one of the millions that joined the crypto world during the bull run of 2021, you may be wondering what’s next after purchasing your first holdings.
“I heard this stuff is the money of the future,” you may be telling yourself. “There’s got to be more I can do with it. How do I get more involved?”
If this is the case, it sounds like it’s time for you to enter the world of decentralized finance (DeFi). Have you heard the term “yield farming”?
Yield farming is one of the main reasons the DeFi landscape shot in value from $500 million to $10 billion in 2020. It’s a great place to start taking your crypto journey to the next level.
So what is yield farming crypto and how does it work?
Read on to hear yield farming, AKA cryptocurrency farming, explained.
A Quick Refresher on Interest and APY
Do you remember learning about loans, banks, and interest in grade school?
You store your money in the bank. The bank sometimes lends it out to other people, then pays you a small fee as a thank you for the access. By leaving your money in a bank with a good interest rate, you make money while you sleep.
Maybe you’ve gone on to see what the current interest rates are at the world’s most popular banks. If so, you’ve likely been disappointed!
Most traditional savings accounts offer between 0.1% – 3% annualized percentage yield or APY. Put $100 bucks in a savings account and one year later you’ll get something between ten cents and $3. Don’t spend it all in one place.
DeFi Interest Is Different
In the world of DeFi, on the other hand, nothing is traditional. In the volatile realms of cryptocurrency, assets are unpredictable, often surging and crashing in value.
For this reason, crypto investors are rewarded more mightily than their fiat counterparts. They take on a great deal of risk in the volatile market; by helping projects get off the ground, they are handsomely rewarded.
When a would-be investor deposits a chunk of their crypto earnings with a given crypto bank, the interest rates can be out of this world– sometimes jumping as high as 100% APY!
But yield farming is not as simple as earning interest. The magic is in intelligently moving those funds around for maximum returns.
Yield Farming Crypto Is Banking On Steroids
Have you ever heard the news story about the boy who traded up from an old cell phone to a Porsche? By making a series of exchanges that were each slightly favorable to him, over time his return on investment became staggeringly huge.
So What Is Yield Farming?
How does yield farming work? Well, it’s a little like that young man’s trade.
A skilled farmer will stake his or her crypto in a rotating set of “banks” (known in the crypto world as “liquidity pools”), always chasing the one with the highest interest rate and rewards.
If they’re any good at it, a cryptocurrency yield farmer will then go on to make a fortune. That is one of the primary benefits of yield farming: starting with a cell phone, they can farm their way up to a Porsche.
Startups Need a Bank To Get Started
Because crypto is a booming space with a large number of new companies, there’s a great demand for farmer’s tokens. How can a bank run without a bunch of money for it to lend, exchange, and borrow against?
Any crypto startup needs currency in the bank to get started, and true to the decentralized philosophy of the crypto world, they would rather be funded by a big mass of users than any venture capitalist firm or wealthy investor.
So to entice you into investing with them, startups will offer generous rewards for storing (commonly called “staking”) your currency with their product.
Liquidity Mining: Cryptocurrency Farming Explained
So is that all there is to yield farming cryptocurrency? Simply moving assets from one pool of money to another, chasing the best interest rate?
Well, you’ve probably noticed by now that cryptocurrency is complicated. The answer is no. There is still much more to it than that.
What if I Reward Your Money With New Money?
In the examples above, a given pool rewards the investors that stake in it by offering handsome APYs for their funds.
But what if, instead of simply offering a great interest rate, the pool rewarded its investors by giving them an entirely new form of cryptocurrency?
The thought behind this is what gave birth to “liquidity mining,” one of the hottest sections of the yield farming space.
A Brand New Token
Imagine you deposited your $1,000 paycheck into your bank; let’s call it “Fiat Credit Union.”
“Thanks for selecting Fiat Credit Union,” you see in your email the next day. “As a token of our appreciation, we’ve deposited one Fiat-Credit-Union-Buck in your account.”
Of course, in the non-crypto world, it is not this easy to mint a brand new currency. But with the magic of blockchain, it is!
At the moment, that 1 $FCUB they gave you is not worth much. But what if the Fiat Credit Union gets more popular and more people rush to deposit their money there? The token will get increasingly valuable.
Then you could sell that token to a newcomer to the Fiat Credit Union and turn a profit, moving your funds to the next promotional coin offering and liquidity pool.
Don’t Forget To Be Careful
There is a great deal of risk in any domain of crypto. Yield farming is especially volatile since you’re often dealing with new, unproven companies. Be sure to research your providers and double-check the URLs of every address you visit, as scams are frequent.
That being said, if you’re careful, and never invest more than you can afford to lose, yield farming is a smart way to begin seeing greater returns than you would with mere speculation.
How to Start Yield Farming with SmartCredit.io
SmartCredit.io is a loan marketplace, but it doesn’t mean that you can’t use our platform to start yield farming. The only thing you need to do is sending a loan request via our application and use the deposited token to start yield farming.
The procedure for the borrower/investor is following:
- The investor would borrow a fixed-term against his existing collateral assets
- The investor would receive the stablecoins (USDC, DAI, or USDT)
- The investor would invest the stablecoins into the Yearn. finance or the Curve pools
- The investor would redeem the assets from the Yield Farming and pay back the fixed-term-loan
- The difference between the Yield Farming yield and interest paid is the profit for the Borrower.
This approach allows every borrower to become an investor.
Further information: Yield Farming with Fixed-Term-Loans
There’s No Teacher Like Experience
Like so many other regions of technology, the best way to learn yield farming crypto is to try stuff out and see what happens. Cryptocurrency farming explained with real-life experience is the best way to proceed.
Why not try out staking a small amount of your crypto in a safe, professional environment like SmartCredit.io? With traditional yield farming options as well as Fixed Income investments, Smart Credit is a great place for a budding investor to begin learning and lending.
The good news about yield farming and liquidity mining is that there’s no penalty for starting slow. Be sure to research changes in the field and how you might adapt your strategy.