Yield Farming is a cornerstone of the Decentralized Finance (DeFi) movement enabled by blockchains with smart contract capabilities such as Ethereum and BSC. Yield farming is a way for investors to earn returns by depositing funds into a “farm” consisting of various pools that are purely governed by a smart contract. Users can “farm” the returns by “harvesting” the rewards (like $GEM) as you would a crop, and then choosing to sell them, keep them or reinvest them. Funds deposited in a legitimate yield farm are governed only by the rules publicly verifiable in the smart contract code; no one else has arbitrary control of the funds, unlike in a traditional banking or investing scenario.
The Pools (which can be found in the Clam Island Bank) as of writing.
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The process is similar to staking as it involves depositing and locking cryptocurrency holdings for a certain period of time. However, while staking uses cryptocurrency tokens to power a blockchain or protocol, yield farming uses cryptocurrencies as liquidity for other investors or traders.
Those that take part in yield farming and provide liquidity to DeFi platforms are known as liquidity providers (LPs). The liquidity is often used for decentralized exchanges, trading or loans. As the sector advances, there will undoubtedly be even more use cases in the future.
At the time of writing, the total value locked (TVL) in DeFi protocols by liquidity providers is $65 billion.
Decentralized finance, or DeFi, seeks to decentralize traditional financial services. By utilizing smart contracts, which are programmable functions updated on the blockchain, DeFi protocols are able to run an automatic, trustless and permissionless service. One of the more lucrative advancements for cryptocurrency investors is having the opportunity to lend cryptocurrency holdings for a return on investment. This process within DeFi is often referred to as yield farming.
Liquidity providers, those seeking to earn interest from idle cryptocurrency holdings, can deposit their funds into a liquidity pool. Liquidity pools can be thought of as a "pot" of cryptocurrencies that other users can use for exchanges or loans. To use the pot of cryptocurrencies, the user has to pay a fee. These fees are then distributed proportionally to liquidity providers depending on their share of the liquidity pool. The rewards are usually in the form of cryptocurrency tokens.
Automated market makers are algorithms (a series of smart contracts) that calculate the exchange prices and interest rates on a platform based on the available liquidity held within liquidity pools.