Yield Farming 101
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If you have some cryptocurrency holdings, you might be interested in ways to earn passive income from them.
As a matter of fact, many people are already leveraging their cryptocurrency assets to generate decent returns on the side using different strategies.
Speaking of which, yield farming is one such strategy and is perhaps the most popular way of profiting from your idle crypto holdings.
Don’t worry if the term “yield farming” sounds Greek to you.
Let me tell you what it is all about.
First Things First, What Is Yield Farming?
In simple words, yield farming is when you use your cryptocurrency holdings to earn interest, pretty much the same as earning interest on the money in your savings account.
The idea is to lend the cryptocurrency that would normally just be sitting in your account to generate returns.
How Are Yield Farming Returns Calculated?
With yield farming, earnings are estimated in terms of annual percentage yield (APY).
And just to elaborate on that, APY is simply the rate of return gained over a year on a particular investment.
Compound interest, calculated regularly and applied to the amount, is factored into the APY.
For example, if the APY is 5% and you invest $1000, your investment returns would be $1000*5%=$50 per year or $1000*5%/12month=~$4.2 per month.
Now Let’s Talk About the Different Ways to Do Yield Farming
1. Providing Liquidity for a Liquidity Pool
A liquidity pool is a decentralized place where two cryptocurrencies that you are interested in trade and are pooled together such that they are always available.
That means you can exchange your cryptocurrencies whenever you want.
Many decentralized exchanges, think of Pancakeswap, Uniswap, etc., use liquidity pools as their underlying technology.
Now for the burning question: Exactly where does the cryptocurrency in the liquidity pool come from?
Anyone can become a liquidity provider for a liquidity pool as long as they have tokens or coins to put in.
These coins and tokens are then availed to traders who want to swap their cryptocurrencies.
That said, you need two coins to offer liquidity, typically in the form of a crypto pair.
In return for providing liquidity to a pool, you earn a fraction of the trading fees from the swaps the traders make within that pool.
The fraction of earnings you get is proportionate to your share of the total liquidity pool on the protocol.
Let me give you an example to explain this better.
Assume you provide $100 of Solana and $100 of Cardano ($200 total) to a liquidity pool with a total value of $2000.
In this case, your share of the pool is 10%.
If the fees collected on exchanges between Solana and Cardano on a specific day are $200, you’ll earn $20.
2. Staking Your Cryptocurrency
You can also do yield farming by staking your cryptocurrency to earn rewards.
If you do not know what that means, staking is simply providing your cryptocurrencies or locking them up in a particular blockchain to help it secure transactions, and note, this is actually what you are rewarded for.
Generally, you can expect anywhere between 4% and 10% APY from staking your crypto assets, which I must say is pretty decent.
Examples of cryptocurrencies that allow you to yield farm through staking include Ether, Cardano, and Solana.
Basically, staking is possible when a cryptocurrency uses the proof-of-stake consensus mechanism.
Be sure to check out the staking rewards, mostly from the platform’s website that shows you the different cryptocurrencies you can stake as well as their APY.
Ready to get started?
True staking is somewhat complicated, so I will tell you the easy way.
You can do it through a crypto exchange, for example, Binance or Coinbase, as long as you have a crypto wallet.
These exchanges will handle the technicalities and add your rewards to your balance.
Another way to approach it is through a staking pool, which is essentially where you pool your resources together, stake like so, and share the profits.
For a pro tip, be sure to stake only the largest and renowned cryptocurrencies to reduce your risk (think of stablecoins).
3. Lending Your Coins
Another way to do yield farming is through lending your cryptocurrency.
It involves putting your coins or tokens into a lending protocol, which is simply a place where crypto holders can take out loans on their coins or tokens without liquidating them.
As a lender to a lending protocol, you earn the interest paid by borrowers of your asset.
Final Thoughts
Now that you know how to earn passive income from your cryptocurrency with yield farming, it just might be time for you to put this knowledge into practice.
But before you do that, beware of yield farming risks such as changing interests and the never-ending volatility of cryptocurrencies.
I hope you got some valuable pointers from this article. If you want to learn more about how to reclaim your emotional, spiritual and financial sovereignty, be sure to check out my pages / YouTube channel.
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