Yield farming is lending crypto to earn gradually more currencies. A computer offers a smart contract where you lend others money on cryptocurrency sites. Later, your return comes in fees form. Farmers have a way to do yield farming through DeFi.
Although the trading is complicated, farmers master the marketplace. It is a good deal that yields return with careful marketplace mastery. Once a farmer realizes a marketplace that yields well, the farmer keeps it to himself. When many farmers realize the effectiveness of crypto, they all invest in it.
The Background of Yield Farming
Compound Finance ecosystem launch attracted the idea of the platform. Government has tokens in this platform used as a reward for yield farmers.
The tokens are distributed randomly with offers that attract more farmers to crypto. The offers are liquified, therefore liquid pool.
While the Compound Finance ecosystem didn’t pioneer the investment, it did enhance the adoption of this type of token distribution plan. To attract more customers, the DeFi project come up with pleasing ways.
Total Value Locked (TVL)
It is a general way to measure the health of a DeFi yield farming site. It determined invested amount of money in crypto with a variety of marketplaces.
TVL is, in some ways, the total liquidity in liquidity pools. DeFi and yield farming measurement matter a lot. It’s also a way to compare the market share of various DeFi protocols. DeFi Pulse is a spot to keep track of TVL. You can see which platforms in DeFi have the most ETH or other crypto assets locked up. This can offer you a basic picture of where the site is right now.
Obviously, with more savings, a farmer yields more. ETH, USD, and BTC are measurements for TVL. Each will provide you with a unique perspective on the state.
How Yield Farming Works
Similar to the automated market maker model, yield farming works with liquid providers and liquid pools. The yield farming works as follows;
Liquid pools have deposits initiated by liquid distributors. This pool is used to fuel a marketplace where users can stake, borrow, and trade tokens. Fees are charged for using these sites and distributed to liquidity providers in proportion to their part of the pools. This is the foundation of an AMM’s operation.
The site earns more money from incentives than the initial investment deposited by farmers. For instance, an open market might offer a token for a small fee. It can be accumulated, on the other hand, by supplying liquidity to a pool.
Stable coins tied to the US dollar are regularly deposited monies, while this is not a prerequisite. DAI, USDT, USDC, BUSD, and other stable coins are among the most commonly utilized in DeFi. Some protocols will create tokens to represent the coins you’ve deposited in the system. If you deposit DAI into Compound, for example, you’ll obtain cDAI or Compound DAI. You will receive cETH if you deposit ETH into Compound.
As you may expect, there are numerous layers of complexity to this. You could transfer your code to a system that creates the third token to represent your cDAI, and you’re DAI. The list goes on and on. These chains can get rates the third token to represent your cDAI, and you’re DAI. The list goes on and on. These chains can get complicated to understand.
Yield farming works well for the patient farmer. It is not an immediate money maker. The farms include the investment of money in crypto to earn from it.
You must choose the currency to deal with that yields good money. With the understanding of TVL, you can understand how the measurement of the market share is measured.