The total value locked in decentralized finance protocols grew from a mere $690.9M in January 2020 to $78.7B in March 2021. Behind this exponential growth of DeFi is a reward system that has attracted people from all around the world. That reward system is called yield farming.
Thousands of investors both experienced and inexperienced rushed to generate profits since yield farming gained popularity. Some made sizable fortunes and some lost their capital. But, irrespective of the outcome, yield farming attracts plenty of investors even today. So, what exactly is yield farming, and is there a way to optimize it?
Yield Farming in DeFi and the Risks Involved
Yield farming in DeFi, in the simplest terms, is the process of depositing crypto assets into a DeFi protocol to earn rewards. It is just like depositing money in a bank. The returns of yield farming, however, are much greater than those of a bank. There are a set of users called liquidity providers (LP) who lock up their crypto assets into liquidity pools and earn either a fixed or a variable rate of interest as a reward.
Liquidity providers can increase their profits further by re-investing these rewards into other DeFi protocols. The returns on yield farming this way could be huge. In fact, top yield farmers earn up to 100% APR (Annual Percentage Rate) by applying some sophisticated strategies. But, the keyword here is “sophisticated.” What we have to keep in mind is that the crypto space is extremely volatile and you may end up losing your capital.
Yield farmers are left on their own to find the highest performing pools, trustworthy DeFi protocols, and the best strategies to grow their assets. A wrong decision in any one of these areas could lead to huge losses. The process involved is also quite complicated. Once you invest your tokens, you get another set of tokens called LP tokens. This dual asset affair again needs high-level technical knowledge which beginners lack. Not to forget, this entire process could get quite expensive because of high gas fees on DeFi platforms.
This might come as a surprise but even the founder of Ethereum, Vitalik Buterin, in 2020 decided to “steer clear of yield farming until it settles down into something more sustainable.”
But the question is, can yield farming become more sustainable? Well actually yes. Yield farming can become far more sustainable and optimized on CeDeFi platforms.
>h2>Optimized Yield Farming On CeDeFi Of course you’re wondering what CeDeFi (Centralized Decentralized Finance) is. CeDeFi is a sweet mix of DeFi and the good old CeFi (Centralized Finance).
In the early days of crypto, CeFi was the go-to crypto trading option. CeFi platforms are basically centralized exchanges that let users buy, sell, and trade coins. But on these platforms, you don’t really own your coins. DeFi was born to solve this exact problem. Instead of trusting an exchange, users trust a protocol and they have full control over their assets.
CeDeFi comfortably sits between the two. It brings together the best features of both DeFi and CeFi. Doing this brings in a lot of use cases into the world of crypto but, the most significant one is yield farming optimization.
CeDeFi platforms like MoonFarm make it possible for investors, both beginner and experienced, to safely yield farm for maximum returns. The process is quite simple, on MoonFarm you deposit your crypto assets into a vault and then relax. As a hybrid platform, MoonFarm retains some control with itself and takes the responsibility of finding the best performing farming pools and protocols. The best part is that it requires only a single asset and the gas fees are also low compared to DeFi platforms. The platform even harvests rewards and deposits them into users’ wallets.
This way, these new CeDeFi platforms eliminate a significant amount of risk and maximize APR for yield farmers. CeDeFi protocols also support cross-chain functionality making it easier to transact across blockchain networks. Beginners too can comfortably yield farm because most of the work is done by the platform itself. CeDeFi platforms make better utilization of crypto assets and increase their sustainability.
The comfort and the ease of use offered by these platforms could push for mainstream crypto adoption in the long run.
There is no doubt that yield farming is a highly risky yet rewarding venture. Most experts also believe that it is the main reason behind the DeFi boom of 2020. If it becomes possible to somehow minimize the risk, we could see a future where masses invest in DeFi protocols. This is exactly what platforms like MoonFarn aim to achieve. By combining the convenience of CeFi with high APRs of DeFi, they create an optimized ecosystem where risk is minimized and profits are maximized.
Disclaimer: This article is educational and does not represent financial advice. Please consult your financial advisor before purchasing any digital assets.
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