What Is Yield FarmingYield farming, or liquidity farming, is t | Bullets

What Is Yield FarmingYield farming, or liquidity farming, is the act of lending or staking your cryptocurrency into a liquidity pool, through DeFi (Decentralized Finance) to receive rewards such as interest and more of their staked cryptocurrency. Similar to traditional staking, it can be seen as the equivalent of lending fiat money to a bank.Interest rates or rewards rates are often measured in APY, which is the annual return rate of an asset, inclusive of compounding. The more frequently the interest compounds, the greater difference between the APY and APR of an investment. Banks and other more traditional investments usually stick to a flat APR.Yield farming is often seen as the equivalent of silicon valley startups like Uber, which offer great incentives for early investors into the platform. New blockchain apps need liquidity to help sustain and eventually grow the platform, which is where yield farming steps in.All staked cryptocurrency via yield farming is combined into a liquidity pool, usually for a specific pair of cryptocurrencies, such as CRO/ETH. These liquidity pools may be operated by Automatic Market Makers offering automated and permissionless trading tapping into liquidity pools instead of the generic buyers and sellers system.When investing in a liquidity pool, users will receive a Liquidity Pool token to keep track of their overall contributions to the pool. This LP token will represent the percentage of the liquidity pool the investor has provided and will be exchanged when you exit the pool.Fact: The word ‘farming’ in yield farming comes from the farming analogy about ‘growing’ your cryptocurrency.What Is a Yield FarmerA crypto enthusiast with in-depth knowledge and a high tolerance for risk, continuously and relentlessly trying to optimize their yield by staking cryptocurrency. Yield farmers will often move to different pools every week, chasing the highest APY.For example:A yield farmer may make an initial investment into a farm using x token. They will receive some Y tokens for their participation.They may then go and use their Y tokens on a liquidity pool that offers even more rewards, always trying to optimize their return.How It WorksAn investor will stake their cryptocurrency coins through a ‘lending protocol’ via a dApp (decentralized app on DeFi). Now that their liquidity is in, other investors can choose to borrow the liquidity for their own investments, trying to catch large swings in the staked coins' price.As yield farming is used to reward early investors, often governance tokens of that blockchain will be given out to keep them as a user, and their liquidity in the system. Governance tokens help keep a project decentralized and allow real users to vote on any new legislature. Governance tokens are at the core of any DAO or project which aims to be fully run by its users.Liquidity pools essentially keep the ecosystem alive and are where most of the early liquidity will come from in smaller projects.What Are the Potential Rewards?Yield Farming first came available in 2020, and many yield farmers have bragged about triple-digit APY rates, unheard outside of the crypto space. However, these rates bring volatility. Often, the tokens received as rewards from such farms are extremely volatile and prone to rug pulls. We will dive deeper into the risks of yield farming later in the article.You can find a full list of the most used and profitable yield farms, with daily and yearly APY here. CoinMarketCap simply views this as a resource and investors are recommended to do their own research before dipping their toes into the volatile world of yield farming.Many yield farms with low impermanent loss risk continue to hold double-digit yearly APYs, with niche coin pairs and riskier farms reaching triple and even quadruple-digit APY returns, unsustainable but profitable in the short term.Although almost all crypto trading is speculation, to consistently profit from yield farming, high-level strategies are usually required and a decent chunk of change…