DeFi yield farming is a high-reward practice that has gained popularity in the crypto market and provides extremely high ROI to crypto investors. The high rate of return on investment has enticed many traders towards yield farming, and this sector is likely to grow in the next few years. DeFi, which stands for “decentralized finance,” is a financial ecosystem built on blockchain technology. It involves investing, borrowing and lending, trading.
DeFi yield farming is an investment procedure. Assume a user has $1000 in cryptocurrency. The user can deposit those crypto assets to a yield farming platform and receive interest on the amount committed. What makes it intriguing is that the cryptocurrency that the user deposits is utilized to provide asset liquidity for traders on the site. While banks give 2-5 percent interest on deposits, DeFi Yield Farming Development might offer large interest rates, which can be as high as 100 percent or more.
The market has various DeFi yielding farming platforms; the popular ones include Aave, Compound, Curve Finance, Synthetics, Uniswap, and Balancer. Anyone may put money into these schemes and receive interest in them. Users, or yield farmers, strategically transfer cash across protocols or exchange tokens to maximize yield. Crop rotation is another name for this practice.
When yield farmers lend their crypto coins to a DeFi platform, the DeFi protocol incentivizes them with a predefined interest or other rewards. Users can change their production based on the tactics that would provide the maximum yield. To assure significant payouts, a user needs to invest time in learning about blockchain technology, DeFi protocols, and the numerous yield-producing tactics.
How to build a DeFi yield farming application?
A DeFi yield farming dApp provides a platform for users to invest their coins while also facilitating the automation of incentive payments for the liquidity provider.
The yield farming platform includes the following:
Lending, borrowing, supplying capital to liquidating pools and staking liquidity provider tokens.
Lending: Users get a return on the tokens they’ve locked with DeFi platforms by lending them to the platform, which pays them more coins. These tokens can then be swapped or re-invested to earn profits through liquidity mining.
Borrowing: Borrowing tokens, on the other hand, enable users to use them as collateral in a separate protocol. Swapping the coins to various protocols and continuing the cycle results in a substantial payoff based on the initial capital.
Supplying coins to Liquidity pools: Liquidity pools are smart contracts that have tokens invested in them, and they give liquidity to the DeFi platform. To trade, each pool contains a pair of tokens. The balance of the pool contract is set to 0 tokens when it is formed. As a result, the pool’s pricing is established by the original supplier or the first investor. To avoid the possibility of arbitrage, each token must have the same value (an opportunity for external sources to get the tokens at a low price and reinvest immediately to another platform). To prevent the same arbitrage risk, the providers that come after must invest proportionately in both coins. In Uniswap, for example, a pair of ERC 20 tokens is swapped. The pool’s return comes in the form of a liquidity token, which is a tradeable asset that may be exchanged or sold.
Farming strategies, on the other hand, are unpredictable, and it’s critical that the farmer follows the correct protocols and keeps themselves updated based on the protocol and the strategy’s worth.
Risks involved in DeFi yield farming
The high return on investment associated with yield farming is matched by the high risk considerations involved in the operation. To begin with, there is the possibility of liquidation, which is an issue when the market value lowers. Then there’s smart contract risk, which includes contract flaws, platform updates, admin keys, and systematic hazards. These risks arise because smart contracts are an inherent part of the deals.
Before getting into yield farming, it’s also crucial to understand the consequences of temporary loss. A liquidity provider’s transitory loss of cash is referred to as an impermanent loss. The liquidity pool is a good example of this. When the pool’s balance shifts, there’s more room for arbitrage. This results in a short-term loss. In some circumstances, the liquidity pool program’s incentives to providers might decrease the amount of money available to the provider.
The significance of withdrawing or maintaining liquidity, as well as a thorough grasp of the DeFi protocol, is critical for the liquidity provider to make a profit.
Thus, risk management is an important aspect during DeFi yield farming development. The platform should enable users to manage their risks, and users are more likely to rely on platforms that offer risk management solutions.
If you are planning to build a DeFi yield farming dApp, Antier Solutions can help. We have a team of finance and blockchain experts who offer world-class yield farming platforms that users want. We develop and deliver platforms that help you disrupt the market and take the lead.