Decentralized finance (DeFi) is a megatrend in the cryptocurrency world that is becoming increasingly popular. Today cryptocurrency investors often invest in at least one DeFi application.
The DeFi universe consists of many trends. One such destination is Yield Farming, a profitable farming business. But while interest in Yield Farming is steadily growing, investors continue to wonder what Yield Farming is all about.
What is Yield Farming?
Yield Farming can be well illustrated by the example of agriculture. A farmer grows a wide variety of plants in his fields throughout the year. The farmer gets the harvest only after a few months of hard work. However, we should not forget about the yield. It depends directly on the crop being grown.
Farmers in the crypto sector are investors who invest their coins in various platforms to maximize returns. The higher the yield per fixed deposit, the higher the income achieved.
Once again, Yield Farmers are investors who measure the return on their investments in percentages received.
Why has Yield Farming become so popular?
Yield Farming's popularity is based on the high demand for DeFi solutions. As recently as last year, Yield Farming was identified as a trend for 2021. In 2020, the market for Yield Farming was growing by leaps and bounds thanks to a pandemic that caused hundreds of investors to look for alternative tools to preserve the value of their money.
The beginning of the Yield Farming popularity was the launch of the COMP token. This event allowed Compound investors to earn COMP for using the platform. Because of this, investors invested thousands of dollars in Compound to get new COMP tokens.
Accordingly, the price of COMP skyrocketed after this event. At the same time, COMP became the DeFi token with the highest market capitalization. However, Compound is not the only example of a platform that allows profitable farming.
Alternative platforms are Balancer (BAL), Yield.Finance (YFI) and Synthetix (SNX).
What opportunities does Yield Farming provide?
Yield Farming offers more returns than investing in deposits. Basic interest rates in Western industrialized countries are at zero or even negative levels. Consequently, depositors receive no interest on cash deposits, and inflation eats away at the purchasing power of the population.
What is the disadvantage of Yield Farming?
The disadvantage of Yield Farming is the high risks. Given these high returns, it is not surprising that investors invest massively in such projects. However, investors also need to consider the yield in relation to the risk taken. On the one hand, the yield is very tempting, but on the other hand, the risk is very high.
For example, there is no state deposit insurance to protect investors from a platform default. For example, a large number of investors might want to withdraw their money from Compound. If there is not enough liquidity, investors will not be able to get their investments back.
Moreover, ETH is currently the most important cryptocurrency in the DeFi sector. There is excitement among investors about the high cost of gas on the network. Because of this, a large amount needs to be invested to cover operating costs and generate profits. Today, those investors who operate with sums of less than $1,000 are unlikely to make significant profits.
Another problem is smart contracts, which can be vulnerable to hackers. There are already known cases where hackers have hacked into smart contracts and gained access to huge sums of money. For example, in 2018 the cryptocurrency exchange OKex lost 8 vigintillions (a number with 63 zeros) of units of the cryptocurrency BeautyChain due to errors in the smart contract.
Therefore, profitable farming is not only about profits, but also about risks.
Where to keep profits from Yield Farming?
You can store profits from Yield Farming in a non-custodial Sapien Wallet. The Ukrainian team has developed a convenient cryptocurrency wallet in which you can send and receive cryptocurrency through a special chat. Moreover, each user has his or her rating, which affects people's trust and minimizes the risk of being cheated. With this cryptocurrency wallet, your tokens will be as safe as possible.
Disclaimer: This writer is a Sapien Wallet team member and thus has a vested interest in the company.