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The ultimate guide to yield farming
guide yield farming
DeFi
Table of Contents:

What if you were able to make more crypto using crypto? That sounds good, doesn't it? Well, you can with yield farming. You've probably heard of yield farming, but if you're new to DeFi, it might be somewhat unfamiliar. Yield farming is a great way to make passive income by investing crypto you already have into liquidity pools to create passive income with high APY opportunities. Once you start earning through yield farming opportunities on Avalanche, Ethereum, Polygon, BNB Chain, Optimism, or Arbitrum you can off-ramp your earnings or pay bills with crypto directly.

Yield farming has quickly become one of the most popular ways to grow wealth in the cryptocurrency industry. Whether you're a beginner or an experienced crypto enthusiast, this comprehensive guide will cover all of the important aspects of yield farming and explore how it works, its history and benefits, which services to use and how to navigate risks involved to maximize your financial gains. Get ready to maximize your profits through yield farming!

What is yield farming?

Yield farming involves locking in crypto assets for passive income generation. An annual percentage yield (APY), is a common representation of this type of income. In other words, it measures the future return on an investment. There are tons of opportunities to earn yield on just about any major layer-1 blockchain network. Avalanche, BNB Chain, Polygon, and Ethereum have some of the most lucrative yield farming opportunities out there today, from the yield farming opportunities on PancakeSwap to liquidity providing on platforms like Aave.

It is important to account for another metric in yield farming - APR (annual percentage rate). APR doesn't consider compounding interest, which accumulates both on the initial deposit and on the periodic accumulated interest, unlike APY.

Initially, the main focus of yield farming was on providing liquidity for decentralized exchanges (DEXs), with investors using their capital to provide tokens that could then be traded and exchanged between users. However, soon after its introduction other protocols began to emerge which allowed users to stake their assets in order to earn additional rewards. This led to the emergence of a brand new industry known as DeFi, which has since grown into one of the most popular markets in crypto today.

In 2020, Yield Farming reached the mainstream thanks to its rapid growth in popularity and profitability, with numerous products being launched that incentivize investors through various reward programs such as staking pools and flash loans. As more people become aware of yield farming opportunities they are able to take advantage of these protocols and maximize their profits through careful management and research. With this newfound interest from everyday investors, we can expect plenty more innovation within the space over upcoming years!

There are several different types of yield farming:

  • Staking: To secure and verify their respective networks, smart contract blockchain networks such as Ethereum (ETH), Algorand (ALGO) Ethereum, Avalanche (AVAX), Solana (SOL), Cardano (ADA), and  Fantom (FTM) use proof-of-stake (PoS) consensus algorithms. A PoS node holds the entire blockchain record and validates new transactions as they come in, earning a reward for doing so. Users can stake their crypto into a node to earn passive rewards through their investments. The blockchain allows traders to utilize the technology while giving validators a cut, similar to yield farming by staking in traditional liquidity pools.
  • Providing liquidity: When trading two tokens, such as ETH and USDT, a liquidity provider will lock in their funds on either side. A liquidity pool is a pool of funds that are locked in a smart contract, which serves the same purpose as a bank vault. Liquidity providers (LPs) then earn income from yield earned by providing that liquidity.
  • Lending and borrowing: Traders can also lend and borrow their tokens to earn a passive income. Lending tokens allows holders to earn a return on what they’ve lended, while borrowers will borrow crypto in order to invest it and make a return through that. Once they see returns on their investments, they can pay back the initial loan and keep the profits. This is a higher risk investment opportunity, especially in volatile market periods, but one that is popular nonetheless.

Why do people get into yield farming?

Yield farming is a great way to earn returns on crypto without actively trading it. There are lots of ways to earn in DeFi, and yield farming allows investors the safety of being able to earn without having to stay glued to market conditions. Yield farming has flourished in the last couple of years, especially in bad market conditions where traders can earn passive income without actually making trades and selling their assets.

Yield farming tips: 

  • Decentralized apps pay interest when people invest or lend their coins. A crypto asset's demand determines the interest rate.
  • Daily interest is paid out in new crypto coins.
  • As the value of these new coins increase, so does the overall value of the invested assets.
  • It is better to do this than to store crypto in a wallet without using it.
  • Compared to other passive income sources, interest, transaction fees, token rewards, and price appreciation offer a higher return.
  • Yield farming is an inexpensive alternative to mining, which requires specialized equipment or a large down payment to become a validator on a Proof-of-Stake network.

Best yield farming opportunities:

Aave is a liquidity protocol that uses open-source software to enable lending and borrowing on the Ethereum network. The protocol creates liquidity pools that let you earn yields from lending, or you can use your crypto as collateral to borrow.

Uniswap is a decentralized exchange that uses liquidity pools to back exchanges on the network. By depositing tokens into a pool, users can earn rewards from trading fees generated from other users’ trades—making it an ideal option for those looking for passive income streams. Earn up to 20% APR through yield farming on Uniswap on the Ethereum network.

Curve Finance offers an Ethereum-based liquidity pool that lets you earn a yield for staking your crypto in the network. The Curve Finance decentralized exchange specializes in offering exchange opportunities for different stablecoin assets.

Quickswap is another decentralized exchange that enables yield farming through a service called Dragon’s Lair which lets you stake $QUICK to earn yield. This is a great yield opportunity that provides liquidity into the Quickswap dex platform on the Polygon network.

Pancakeswap offers liquidity provider opportunities that are a great way to earn passive income through yield earned on the platform. Pancakeswap is one of the largest decentralized exchanges on the BNB Chain network, making it a great longer term opportunity if you're looking to make passive income on the BNB network .

Curve is a decentralized exchange that lets users stake and earn through swap fees and other incentives. Its network offers fantastic yield farming opportunities on the Ethereum network and is often touted as one of the best yield farming programs in DeFi today.

Yearn Finance lets users and DAOs (Decentralized Autonomous Organizations) earn passive income in crypto through a suite of DeFi products designed to streamline earnings and operations within the Ethereum network.

Trader Joe is one of the most popular decentralized exchanges on the Avalanche network, and offers yield and other earning opportunities through liquidity providing and staking within the platform.

How to earn passive income from yield farming:

Rather than letting your crypto assets sit in your wallet, yield farming can generate passive income from your holdings. With various yield farming protocols available, you can either stake a token to grow your crypto portfolio, or take advantage of the various incentives to provide liquidity.

While yield farming is a great way to earn passive income, it’s not without risk. Cryptocurrency is volatile, and in a bear market that volatility might be even greater. Beyond the day to day volatility, there are fraud scams and rug pulls that happen regularly, and smart contracts are susceptible to hacks and exploits if they don’t implement good security practices. Avoid these scams by being well-researched.

What to do with your crypto earnings through yield farming:

Yield farming is a great opportunity to earn a passive income in cryptocurrency. Many of our users earn their crypto through yield farming and use that income to pay bills like their utilities, mortgage, rent, or student loans. If you're just getting into yield farming, start with a small goal for a milestone that you can reach with the opportunity. Set aside a certain amount of your monthly crypto income to go toward bills—no matter how big or small—and make it a goal to continue growing that income and reach new milestones.

You can use Spritz to off-ramp or pay bills with crypto directly from your wallet. This is the easiest way to take your earnings and apply them to the real world without having to trigger multiple tax events. Spritz lets you control how much you want to put toward your real-world finances, so you can start with a goal as small as covering your weekly coffee runs or your Netflix subscription by paying off that amount toward your credit card each month, or you can aim high and pay down your mortgage or pay off credit cards in one go. There's no limit to what you can do with Spritz!

Risks to understand in yield farming:

A good rule of thumb with any cryptocurrency investment is to be wary of new projects, and if something sounds too good to be true, it probably is. Opportunities that are promising massive yields are likely a scam. There is no such thing as a get rich quick opportunity. Take the time to understand the cryptocurrency market and the risks associated with yield farming before you make any investment decisions.

Once you start earning, you can then use your passive income to pay bills in the real world using Spritz in a single transaction. All you have to do is claim your earnings, and then you can head to the Spritz app to pay bills with any token on the Ethereum, BNB Chain, or Polygon networks without having to off-ramp to a bank or swap your tokens first. You can also send your crypto to your bank account directly by using the Spritz off-ramp feature, which lets you off-ramp any token on our available networks straight from your wallet.

Cheers!
The Spritz Team

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