Yield Farming: An in-Depth Look + an in-Depth Look at How Bitcoin Miners Operate
Blockchain and DeFi have been the primary forefront in most of the innovations attributed to the financial ecosystem, especially in recent years. This is wholly attributed to their uniqueness, permissionless nature, as well as the range of concepts emerging from the innovation regularly.
One of such concepts birthed by DeFi is yield farming. It is a relatively untapped approach to earning more rewards by holding crypto assets with permissionless liquidity protocols. For anyone looking to earn passive income with their cryptographic coins, this may be an extremely accessible option.
With that said this article covers all you need to understand about yield farming, also referred to as liquidity mining, the harvests/returns, as well as the risks attributed to this venture. Before exploring what liquidity mining entails, let’s have a brief overview of how bitcoin miners operate generally.
How Bitcoin Miners Operate
Essentially, the fundamental concept of mining is carrying out a set of activities to access a specific amount of rewards. Every form of mining begins with the blockchain. As you probably know, blockchain indicates an online distributed ledger that actively records every transaction all through a network. The set of approved transactions are referred to as blocks. These blocks are linked together to develop something like a chain, hence the name blockchain!
In Bitcoin’s network, the primary aim of a miner is to add individual blocks to the distributed ledger by completing a complex set of mathematical problems. This effort needs a significant amount of electrical and computational power. Although several miners are in constant competition to add
each block, only the one who successfully finds a solution to the problem can add the block. On completing this process, the miner qualifies for a reward of 6.25 bitcoins which is halved every four years or every 210,000 blocks through the process of bitcoin halving.
Now, with a background understanding of the fundamental concept of mining, let’s explore what liquidity mining/yield farming is all about.
The Basics of Yield farming
In essence, yield farming is a way to make more crypto with your crypto. Following the basic concept of mining (accessing rewards by completing some tasks), liquidity mining requires that you lock up your cryptocurrencies to access specific rewards. This is pretty similar to what Uberstate offers with its. Me Wallet, which allows you to store BTC or ETH, and get paid daily returns which could be up to 12 % annually in BTC.
In a way, we could parallel this strategy with staking. However, there are some background discrepancies and complexities. In most cases, yield farming works with users referred to as Liquidity providers, whose primary objective is adding more funds to the liquidity pool. In case you are wondering what liquidity pool comprises, it is essentially a smart contract containing funds. As rewards for providing liquidity to this pool, the providers qualify for a form of incentives, which usually come from fees coming from the DeFi platform or several other sources. Considering the extent of benefits embedded in this venture, yield farmers tend to move their funds around across diverse protocols in a quest to accessing higher yields.
The Framework of Yield Farming
The basic idea is pretty straightforward. It typically comprises just two elements, liquidity pools, and liquidity providers. The providers deposit funds into the pool, and as a result, the pool can power an ecosystem where users can exchange, borrow, or lend cryptographic tokens. Operations on the platform incur some percentage of fees, and these are paid out to the LP depending on their contribution to the pool. This model is collect related to the framework called the automated market marker, AMM. Besides the fees, another incentive for contributing to the pool could be new token distribution.
While there are no surefire ways to estimate liquidity mining returns, some of the popular metrics implemented include the Annual Percentage Yield, APY, or the Annual Percentage Rate, APR. The latter considered the effects and impacts of compounding while the former doesn’t. All in all, considering the competitiveness and fast pace of the markets coupled with the expose of rewards to rapid fluctuations, it can be pretty difficult to estimate short-term returns.
Associated Risks | Should You Give This a Trial?
Delving into yield farming is no easy feat. The most profitable strategies in this venture are somewhat complex, and as such, only recommended from experienced users. Besides, liquidity mining is typically more suitable for individuals with a large amount of capital to deploy, such as whales. Thus, it’s not always as easy as it seems. With risks ranging from vulnerabilities and smart contract bugs, you may even be prone to loss of users’ funds. Bar these drawbacks, yield farming is an extremely profitable venture, allowing you to earn passive income effortlessly. If you still nurture doubts about this venture, you can consider Uberstate’s.ME wallet, and at the end of 12 months, you can bid your doubts a warm farewell!
