The yield farming in DeFi is a form of earning on cryptocurrencies. This kind of income implies placing assets in liquidity pools managed by smart contracts. The pools are used on DEX exchanges with the mechanism of automatic market making. As a result, liquidity providers receive a portion of the interest yield from the commissions.

Yield farming has become one of the most important directions of the crypto market development. Over the last 2 years billions of dollars migrated from the traditional financial instruments to the decentralized finance world. The pioneer of this sphere is the Ethereum network with its opportunity to create smart contracts. With the appearance of alternative blockchains that solve the problems of speed and cost of Ethereum transactions, DeFi services have developed even faster. Today, yield farming is available on a large number of blockchains such as Binance Smart Chain, Polygon, Solana, Fantom, Avalanche, and so on.

The yield of liquidity pools can change dramatically and depends on DeFi services, the amount of frozen liquidity and the exchange rate of coins blocked in the pool.

Volatile loss. Due to possible changes in the prices of assets locked in the pool, the liquidity provider may bear the loss or gain less than income they could get holding the coins in the spot market.

There are commissions charged for buying and selling operations made with the help of the pool. Liquidity providers get rewards from the interest of these commissions. The liquidity reward is paid in the pool’s own tokens. Very often, rewards in own cryptocurrency exceed the interest paid on transaction fees.

While the new pools are being created, they are almost empty and you can see incredible returns of thousands of percent per annum. This makes a strong impression on newbies.

Uniswap

This is the decentralized crypto exchange running on an automated market making technology. It uses a pair of liquidity pools and offers various options for providing liquidity to these pools. To reduce the risk, Uniswap proposes to place assets in the pool within the selected range of action.

Curve

This is a decentralized crypto exchange for stablecoin trading. It allows to exchange stablecoins almost 1:1. Curve liquidity pools can consist either of 1 and 3 and 5 coins. If a person is adding a large volume of one coin to the pool, the exchange proposes to split the volume into all the coins present in the pool. Additionally, the crypto exchange provides the possibility to block in the liquidity pool LP tokens of other DeFi protocols, such as AAVE.

PancakeSwap

A decentralized crypto exchange with a very wide range of options. The exchange pays additional rewards in CAKE tokens to liquidity providers. In addition to yield farming, Pancake offers its users a lot of services — crypto exchange, lottery, NFT, IFO.

SushiSwap

The decentralized crypto exchange, operating on the technology of automatic market making with the use of pools of liquidity that replace the usual order book. The Sushi exchange is based on the code of the popular Uniswap exchange mentioned above, but it is created with significant changes. Besides the fixed transaction fee of 0.3%, liquidity providers also get a reward in SUSHI tokens. The earlier liquidity was added to the pool, the higher the percentage of payout in SUSHI tokens on a permanent basis, regardless of TVL growth.

Liquidity pools are one of the most important DeFi elements. Technology is fully in line with the central idea of financial decentralization. Pools allow users to trade directly with a smart contract without having to wait for third-party approvals. Any user can contribute to the liquidity pool. This type of investment brings rewards, sometimes multiple rewards. But we must not forget about the high level of risk, volatile loss, and smart contract hacking cases.

SimpleSwap reminds you that this article is provided for informational purposes only and does not provide investment advice. All purchases and cryptocurrency investments are your own responsibility.

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