If you are still unfamiliar with some of the terms and strategies associated with cryptocurrency trading one of the first questions you might ask in response to the question posed in this article would be what is yield farming and how it works in the world of Crypto.
Let’s take a look at what yield farming involves and then answer the question of whether it is an approach that can deliver profits.
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The crypto equivalent of interest being paid by your bank
So let’s come to the most important question what is yield farming in crypto?
Yield describes the interest you are generating with your crypto investments. It really is the same concept as receiving interest from your bank on the savings you deposit with them.
The practice of yield farming describes a basket of strategies that you might deploy in order to achieve the maximum yield possible. However, there is one fundamental difference between the way interest payments work in traditional finance and the way it works with crypto trading.
Yield farming involves trying to get the highest yield possible but it is a risk-and-reward play that is far more volatile than sitting back and earning interest on cash in the bank.
It is perfectly feasible to earn a triple-digit yield, but you have to accept that there is always an element of risk and a degree of volatility. This means you have to go into yield farming with your eyes wide open and be alert to situations where your yield could shrink or disappear altogether.
Easy to execute
The bottom line is that if you have some crypto funds you will be able to use a variety of protocols that give you the opportunity to gain a better yield.
This is a paperless transaction that is easy to execute using smart contracts that can auto-execute.
The beauty of this system is that you can create a set of conditions where you can use self-execute protocols to take advantage of opportunities for a better yield, allowing you the chance to maximize your returns.
Understanding different yield farming scenarios
You will discover that there are a variety of different methods you can use to generate the best possible yield.
You could use liquidity provision, for instance. This involves another trader exchanging their assets at a predetermined price by you. This locks in a potential profit by receiving a percentage of the fee.
You could try and achieve a higher yield by borrowing and lending. Using price differences and margins to boost your yield.
Another popular option is staking. This involves locking up your tokens in order to earn a yield.
There are various borrowing and lending platforms that let you park your currency specifically to earn a yield.
Can you make a profit with yield farming?
There are definite opportunities to make crypto yield farming profitable. The tactic also comes with a wealth of warning that you should heed. Yield farming can carry significant risks and you need to be prepared for the fact that losses are possible in the pursuit of a higher yield.
It is a strategy that is still embryonic in many respects. Trade with caution and only if you understand the risks you are taking in pursuit of a higher yield.
Always prepare properly and arm yourself with the right amount of knowledge. That way you have a better chance of enjoying a profit with your yield farming plays.