What is Yield Farming

Yield Farming, which some people known as liquidity mining, is a method of generating revenue through the storage of cryptocurrencies. Basically, you are rewarded for keeping your cryptocurrencies secured.

In some ways, yield farming is similar to staking. However, there are a number of complicating elements at play. Yield Farming cultivation is often carried out by users known as liquidity providers LPs, who provide crypto assets to liquidity pools.

What is the definition of a liquidity pool? It is, in essence, a smart contract that contains funds. LPs are compensated in exchange for supplying liquidity to the pool. This compensation can come in the form of commissions earned by the DeFi platform itself or from another source.

Users frequently migrate their funds between platforms in quest of higher returns. that is a means to maximize profit through Yield farming in different protocols

How does Yield Farming Work

Yield farming is linked to a model known as the Automated Market Maker or AMM for short. Liquidity providers, often known as LPs, and liquidity pools are frequently included. Let's have a look at how it works.

Funds are placed in a liquidity pool by liquidity suppliers. The marketplace, where users can borrow or sell tokens, is powered by this pool. These platforms charge a commission, which is then distributed to liquidity providers based on their involvement in the liquidity pool. This is the cornerstone of AMM's operation.

However, there are numerous implementation alternatives, and this is a relatively new technology. There's no doubt that current implementations will see fresh approaches and upgrades.

Aside from the obvious motivation of profit, the distribution of a new currency could be another incentive to add funds to the liquidity pool. For example, a particular token may only be available in modest quantities on the open market. On the other hand, by supplying liquidity to a specific pool, the same token can be accumulated.

The distribution rules will be determined by the protocol's implementation. Liquidity providers profit from the liquidity they supply to the pool as a result.

Image Source

This is @benie111
I would like to hear from you. Do you have contribution or comment? Do well to drop them in the comment section.

Posted Using LeoFinance ^Beta