red 
Content:
In 2020, the rise of Decentralized Finance (DeFi), which drives the main parts of crypto, the increase in yields is said to be the biggest driver of this event. It’s an important component of how blockchain technology works, especially with respect to cryptos like Ethereum and Solana.
Risk-averse investors realized the potential of yield farming and jumped at the chance to use their cryptos to earn “free” interest. However, it’s not exactly free, and depending on the project, the rewards involve a lot of risk.
In this article, let us know in detail about yield and the risks and rewards associated with it.
What is yield farming?
Simply put, yield is a way for investors to earn interest on their digital assets. Lending crypto to DeFi protocols or platforms helps the market become more liquid, and investors who do so are rewarded with a percentage of their investment by sharing transaction fees.
These fees are earned from crypto transactions and interactions on the platform, typically as small as 0.3% of each trade, and are then returned to users as “rewards”. In addition, DeFi platforms and protocols have also begun to offer investors their governance “tokens” as rewards.
These tokens allow owners to discuss, make suggestions, and vote on how the protocol is applied and modified. They are also equivalent to being a shareholder in the traditional financial system. An example is using Uniswap tokens to vote on governance ideas within the Uniswap DAO protocol.
By combining these tokens and interest, profitable farmers can start making real returns on their crypto investments.
How does yield work?
You will understand better if we compare it with traditional finance.
First, you need to open a bank account. Then the whole series of endless paperwork and signatures begins. After some sweet time, the bank certifies that you can deposit your money with them. You are happy to follow some laws regarding minimum balances, minimum first deposits, benefits depending on slabs, etc. All for a pitiful yield that barely outpaces inflation.
On the other hand, in a decentralized finance (DeFi) ecosystem, you only need a few cryptos. Once this is done, you can choose from a number of methods to lock (lock in) your funds for significantly higher returns. The whole process takes a few minutes with no paperwork required.
This entire process is done through smart contracts that execute automatically when specific circumstances are met. All of these procedures use smart contracts that execute automatically when specific circumstances are met. Since smart contracts are created on the blockchain, they are immutable. It is commonly said that smart contracts would be the law if blockchain were a city.
Another pertinent question to address is why these protocols or decentralized applications enable these returns. Some of these protocols act like banks. They take the funds and lend them to someone else (your money stays safe in this situation because the borrower has put up collateral). Other protocols simply encourage participants to create pools of money where traders can gather and trade their assets.
After understanding the definition and working of yield farming, let’s look at some pros and cons to help you make a better and more informed decision about whether you should look forward to yield farming.
Let’s see.
Risks and rewards of return
Rewards for yield farming
- High APYs
One of the advantages of crop farming is that extremely high annual percentage returns (APYs) can be had. Some farms offer APYs as high as 100%, while it’s relatively easy to find farms yielding around 30%. These returns are significantly higher than what other investment vehicles offer, making yield farming an attractive option for many investors. You can easily track the daily returns of major protocols to stay informed.
- Decentralized nature
Another advantage of yield farming is its decentralization. The entire process is governed by smart contracts, eliminating any subjective element. In addition, there are no barriers to entry. Anyone with an active internet connection can be a part of yield farming, although there is a learning curve. However, having an internet connection is the primary requirement.
- No obstacles
The yield of DeFi transcends geographic restrictions. The provenance of a record matters little when it comes to investing. Regardless of where the protocol originates from, investors can participate in yield development without the concern of geographic barriers.
Yield risks
- High volatility
Like any other investment, the crypto market is characterized by high volatility, which leads to rapid fluctuations in the value of cryptos. Such volatility can result in significant losses if the value of the borrowed or borrowed assets declines.
- Immediate loss
In providing liquidity to the pool, the value of the assets being borrowed may change relative to other assets in the pool. Therefore, there may be a loss when removing assets, even if individual asset prices have not declined.
- Scams and scams
Due to the lack of regulation in the DeFi space, it is relatively easy for scammers to create fraudulent decentralized applications (dApps) that promise high APYs to liquidity providers. In some cases, these rogue dApp creators can take crypto deposits from profitable farmers and disappear, commonly known as “pulling the rug.” Unfortunately, rug pulls like these often happen suddenly and without warning, leaving investors with no time to recover funds.
Conclusion. Is it worth doing in 2024?
DeFi platforms have improved user interfaces and introduced new features to improve user experience and simplify interaction with protocols since gaining popularity in 2020. These changes, such as a simplified user experience and improved documentation, help users better understand the platforms and reduce features. costly mistakes. Major DeFi platforms such as Uniswap and Aave have undergone significant upgrades.
One important improvement is the implementation of measures aimed at mitigating risks in the yield sector. Notably, audited smart contracts have become more affordable, reducing the risk of hacking and fraudulent activities. This boosts trust in DeFi platforms and encourages greater participation in the yield sector.
These recent developments make yield farming an even more attractive way to earn from passive assets. However, it remains a dynamic and rapidly evolving area that requires vigilance and time to identify the best strategies.
Overall, yield farming has seen significant improvements since 2020 and can be profitable in certain cases. However, it remains a high-risk, high-reward investment strategy. Therefore, proper research and understanding of the risks is essential before engaging in yield farming.
Disclaimer: Cryptocurrency is not legal tender and is currently unregulated. Please ensure that you carry out a sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information presented in this section does not represent any investment advice or the official position of WazirX. WazirX reserves the right, at its sole discretion, to modify or amend this blog post at any time and for any reason without prior notice.
