What is Decentralized Finance (DeFi)? pt. 2 | Yield Farming

What if I told you that you could use your cryptocurrencies to earn even more cryptocurrency?

Yield Farming

You might have guessed that this was going to turn into a series based on the first post called "What is Decentralized Finance?". The idea with this series is to educate people that are new to cryptocurrency or new to DeFi on how it works. Decentralized finance can definitely be intimidating if you've never done anything with cryptocurrency before aside from just holding or trading it. Another reason that people can find it intimidating, or confusing, is that it does require a little bit of technical know-how to get started.

Have no fear though, NiftyPhill is here to help you learn the ways of the financial system of the future! I also need to preface this by saying I am not an exert nor am I a financial advisor. I'm a guy that has been playing with cryptocurrency since 2015 and has done a ton of different things with it so I'm speaking purely from experience.

You might have heard the term yield farming a time or 2, especially if you spend any amount of time talking to people in crypto. I remember back when it first started popping off and it was all the hype. Everyone was doing degenerate yield farming on the sketchiest platforms that they could find, chasing them gains.

To understand what yield farming is, I felt it was necessary to give you a peak at what it looks like in a general sense. What you see above is a screenshot from LeoFinance's latest DeFi platform called PolyCUB, which is a more advanced version of a yield farming application they've dubbed a "yield optimizer". This platform allows you to stake Liquidity Position tokens in different pools to earn a yield.

Liquidity Position tokens are what you receive in your wallet when you "provide liquidity" to a DeFi protocol. So what exactly does that mean, and why do I need to know? Well if ya wanna yield farm, you need to understand what is actually happening. For simplicity's sake we're going to break down what a liquidity position is and how it works. So, you visit PolyCUB or whatever other DeFi platform and you see a bunch of different pools, but how do you get a slice of those juicy APR yields?!

For example if you look at the screenshot above, there is a pool called PHBD-USDC. This is a trading pair that users are able to swap between the 2 cryptos instantly by paying a small fee. If you want a slice of that 25.5% APR, you're gunna need to provide some liquidity. I'm using this pool as the example because stable coins are easier to work with on math. Don't worry, most of the math is done for you.

So say you have $200 and you want to enter the PHBD-USDC pool. You're going to need to get an equal amount of each one, so about 100 of each. Once you have your 2 tokens of equal amounts to pair up, you're ready to provide liquidity. So you go to the Liquidity page and enter the 2 token, it will do the math for you and make sure an equal amount of each is added based on the prices. I know they're not both 100 in the screenshot but it's just for an example.

So when you provide your 100 PHBD and 100 USDC, you'll receive what's called Liquidity Position (LP) tokens in your wallet. Those tokens can be redeemed at any time for an equal value of tokens based on prices and what you put it. Keep in mind that there's a chance for what's called impermanent loss, which will be a whole different post because it's hard to explain in few words. For this reason I chose a stable coin pool, which shouldn't fluctuate in price very much at all.

Those LP tokens you receive from providing liquidity can then be staked in a yield farming platform to earn additional yield. When staked on PolyCUB, you will earn your 25.% APR in POLYCUB tokens as long as they are locked in the platform.

Essentially - yield farming is providing liquidity between 2 tokens so that people can trade between them easier and you can earn on the fees from trading. Depending on the platform, you can stake those LP tokens and earn more tokens based on which platform they are staked in. Make sense?

If Jimmy wants to swap some PHBD to USDC, there has to be liquidity available in both tokens for him to do that. That's where use yield farmers come into play. It's not much, but it's honest work. We're just simple farmers, after all. Yield farming can be very rewarding but very risky depending on which tokens are being paired. This is why I used 2 stable coins as the example for explaining how it works.

Stay tuned for the next part to the "What is Decentralized Finance?" series to learn about the risks involved with yield farming. I'll be doing a deep dive into impermanent loss. That's all for now boys! Have a great weekend.

Post written by: @l337m45732 aka NiftyPhill.

Posted Using LeoFinance ^Beta