Yield farming is one of the popular methods for crypto investors/traders to generate passive income from their crypto assets. This involves lending or borrowing crypto on DeFi protocols. It allows the traders to earn higher returns.
For those seeking to optimize their crypto investments, yield farming emerges as a favorable choice. The editorial team at VR Soldier has undertaken the task of gathering insights and identifying crucial considerations to contemplate before embarking on this strategy.
Navigating Yield Farming: Essential Factors
Inconsistent Gas Fee
Given that yield farming relies on Ethereum, the computational effort required for transaction or smart contract execution is unavoidable. And to do so, you require Ethereum Gas. Ultimately, the more intricate a protocol is, the more gas is needed for transaction execution.
In brief, gas is utilized to compute the charges to pay within the network to carry out a transaction. Suppose you plan to engage with Synthetix; you’ll necessitate more gas to transfer any SNX because the protocol is more complex than others.
Risk on Debt Pool when Staking
The debt pool embodies the overall value of the tokens you’ve contributed to the platform. Using Synthetix as an illustration once more, when you stake by minting sUSD, you’ve already acquired a share of the debt.
Hence, if a majority of SNX holders possess sETH while ETH surges, then the debt pool will expand proportionally. This implies you’ll require more funds to unlock the SNX again. Suppose you minted 1,000 sUSD, and the total circulation of Synths stands at $1 million; your debt ratio is at 0.1%. You’ll require 1,000 sUSD to unlock your SNX, while the unlock rate escalates as the Synths’ prices double.
Misleading Annual Percentage Yield (APY)
Evaluating your short-term gain with APY can be deceptive and misleading. Since yields are usually based on the anticipated return for a year, the APY percentages in the short term aren’t sustainable. Examining a farming reward lasting only a few days with a volatile rewarding system, APR’s actual computation is dubious.
What Does the Future Hold for Yield Farming?
Ever since their inception, DeFI and Yield Farming have stirred up the internet. With over a million active users in this ecosystem, it’s challenging to predict what lies ahead. Will there be newer, more value-adding, and cutting-edge applications to revolutionize yield farming and DeFi in general? Only time can tell.
One for all and all for one
In order to make money from profitable yield 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 to join forces. This is why communities of profitable farmers have appeared online.
About Yield Farming
Cryptocurrencies, as an alternative financial instrument, open up additional earning opportunities for users. Participants in the decentralized finance (DeFi) market decided to take advantage of this feature. They created a movement called yield farming. Yield farming can seem confusing due to the many technical terms and complex strategies involved. However, in fact, the goal of the movement can be described in just one phrase – achieving maximum income using DeFi protocols.
