What is Yield Farming?
Yield farming is one of the elaborations of the digital currency ecosystem, and specifically, the Decentralised Finance (DeFi) world. Yield farming entails depositing one’s funds into a smart contract address where it is locked up and deployed for various DeFi activities, including lending, borrowing, or staking, to generate revenue or rewards.
Typically, the returns from yield farming are paid through other digital currencies or tokens. So, in the cases when the prices of the locked tokens and the tokens in which the rewards are earned increase, the entire yield farming venture becomes extremely profitable. Yet, yield farming is surrounded by controversies. Particularly, the issues related to its sustainability are beginning to weigh in on the entire narrative surrounding this offshoot of DeFi.
Before the negative sentiment of yield farming is explored, it should be noted that the entire concept is quite complicated. Only those technically vast in the DeFi operations are advised to proceed with yield farming as they tend to understand the risks better.
Positive and Negative Stances About Yield Farming
The fact that yield farming gets a lot of attention is not surprising. This is because the returns from the venture are typically way higher than what is obtainable in traditional finance and other conservative investment options in the DeFi world.
According to a Business Insider report published earlier this month, Virginia-based Fairfax County Police Officers Retirement System is considering investing in yield farming to boost its revenue stream. The report noted that executives of the retirement scheme see yield farming as a fixed income replacement or an opportunity to make higher returns than with rate-sensitive assets.
The positive viewpoint these organisations used to profile yield farming is not the general sentiment, as industry leaders like Sam Bankman-Fried, CEO of FTX, compared yield farming to a Ponzi Scheme. Bankman-Fried’s words have particularly sent shivers down the yield farming and the broader DeFi ecosystem, as many investors are now re-evaluating their stance or approaches to sustainable investments.
With all its complications, yield farming is a lucrative venture for investors who know their way around the space, as they are often moving their funds around from one platform to the other in a search of the best yield opportunities. On the other hand, there is the risk of impermanent loss when investing in yield farming, and unless there is a perfect safeguard to cushion the impacts of these losses, investors may get burnt severely.
How to Make Your Yield Farming Safe
The DeFi world is very vast, which comes with many options that might prove to be enticing to investors. The first principle to yield farming the right way is to never be moved by too-good-to-be-true promises. When the incentives are too good, they are likely to be fraudulent or unsustainable.
Besides, no matter how experienced an investor is, they should never depend on their skills and knowledge only. It is vital to check the track record of the platform and its diligence with security audits. The repository of yield farming protocols is a very attractive pool for hackers, and only a thorough security check can prevent undue exploits that can further make yield farming an unbearable venture for many investors. To play safe, investors can use such cybersecurity rankings as cer.live to check the vulnerabilities of top crypto projects.
While yield farming is not within the primary jurisdiction of centralised cryptocurrency exchanges, platforms like Bitrue tend to offer investors better conditions. Besides the yield farming product the exchange offers, it also recently floated an ‘Investment management product’, powered by a new controlled token ecosystem, which helps maximise yield farming rewards.
The Investment management product combines three investment products into one including staking, yield farming, and quantitative trading. These other aspects of the fund allocation strategies help cushion the many inconsistencies and the unsustainability that is being attributed to yield farming, thus making it a safer bet.
Plus, investors should be cautious while choosing yield farming pools. Invest only in established projects with a growing ecosystem and community. Following the Bitrue case, they are adding new yield farming pools featuring Algorand (ALGO), Polkadot (DOT), and Fantom (FTM), which proved to be reliable projects.
Last but not least, you should never perceive any piece of advice you find on the internet as an investing strategy. In other words, all investment decisions should be your own. Always do your homework and never invest more than you can afford to lose.
Is Yield Farming Advised?
Investing in the cryptocurrency ecosystem takes a lot of guts, and investors need to approach the ventures based on how well they can take risks in general. Whether yield farming is advised or not, it is a function of the investor’s goals, capital base, technical knowledge, and risk appetite. Should all this be intact, deciding to delve into yield farming will thus be coming from the standpoint of knowledge and proper awareness of all the market can bring.