All about DeFi Farm

Cryptocurrencies, as an alternative financial instrument, open up additional earning opportunities for users. Decentralized finance (DeFi) market participants decided to take advantage of this feature. They created a movement called profitable farming. The BeInCrypto editorial team decided to collect information and find out how crypto farmers make money on DeFi.

What is profitable farming and how does it work

Yield farming is a movement whose members strive to squeeze the maximum profit from their investments through DeFi protocols. The name can be explained by the direction of work of crypto farmers - they "grow" their income from investments "sown" earlier.

To achieve the goal, investors use different strategies. Among them are the following:

• Earning interest through borrowing funds and fees. To do this, the farmer needs to register with a DeFi project that issues loans. For example, in Compound. His funds are transferred to another user who has applied for a loan on special conditions - with subsequent payment of interest. The commission received is the income of the crypto farmer from participating in the project. Also, startup tokens are distributed among Compound users. By selling them, or saving them for the future (expecting an increase in the price of coins), you can also get additional profit.
• Liquidity mining. Users are rewarded for working with a specific protocol. As a rule, a startup distributes a certain amount of cryptocurrency between participants daily. The influx of customers increases the demand for a startup and its products and, as a result, the project token becomes more expensive. The first liquidity mining was presented by the Balancer project team. Its users were paid BAL tokens.

• Swaps - exchange of tokens of one protocol for coins of another. An important part of profitable farming is constant market research to find alternative strategies. As soon as a community member finds a new, more profitable investment option, he reallocates funds. This is where the swap principle comes in handy, with the help of which less profitable tokens are converted into other - more economically attractive ones. Among crypto farmers, this procedure is commonly called asset rotation.

There are other, more complex strategies for profitable farming. Many community members are simultaneously using various ways to make money on DeFi protocols.

Crypto farmers' work can be compared to investments in traditional banks. Clients of classical financial institutions place money on deposits and earn interest on deposits. Most choose investment strategies, including based on the level of profitability. As soon as a bank appears on the horizon with more favorable conditions or an attractive interest on deposits, many transfer funds to a new financial institution. Crypto farmers do the same, only with DeFi protocols.

An important difference between the work of crypto farmers and investing in traditional banks is the increased level of profitability, which balances with high investment risks. For example, on the network, you can find information about the 100% annual return of Compound tokens. Traditional banks do not have such deposit rates.

The ability to make money on DeFi protocols in a short time has become the reason for creating various memes on the network. At the same time, unlike banks, no one ensures the funds of DeFi-protocol investors. Accordingly, they risk losing everything

To make money on profitable farming, you need a large database: which DeFi protocols are currently working, where you can get the maximum profit, and when new, potentially profitable projects will be launched. The easiest way to control the situation is by joining forces. That is why communities of profitable farmers have appeared on the network.

An example of community collaboration was seen during the launch of the YAM project. In just a day, on August 11, crypto farmers invested over $76 million in the protocol. At the same time, they were not embarrassed by the lack of smart contract audits in the project. In other words, the startup development team has not yet confirmed the security level of YAM.

Many well-known members of the crypto community, including the founder of the ShapeShift cryptocurrency exchange, Eric Voorhees, drew attention to the suspicious structure of the startup. However, expert opinions have not stopped crypto farmers investing in YAM. The result was expected - two days after the launch, the token of the DeFi project collapsed by 99%. The reason was a critical vulnerability in the protocol.

Conclusion

Profitable farming may seem confusing due to the abundance of specific terms and complex strategies. However, the goal of the movement can be described in just one phrase - to achieve maximum income using DeFi-protocols. To other conclusions:

• Profitable farming is risky. No one can guarantee that the project in which the user has invested will continue working tomorrow. It is important to pay attention to the level of investment security. To do this, you should study the technical documentation of the project.
• An important component of profitable farming is communication between community members. They share information about current projects and opportunities to generate income with their help.
• To make money on profitable farming, you need to understand the features of the decentralized finance market, the principles of digital assets, and the possibilities of interacting with them.

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