In this article, we’ll talk about Aave and guide users on starting yield farming to make money using the Polygon Network.
Depositing funds into decentralized protocols to earn interest—typically in the form of protocol governance tokens or alternative financial incentives—is recognized as Yield Farming. Subsequent members within the ecosystem can then borrow these funds on margin to employ for various trading activities, or in the case of a decentralized exchange powered by an automated market maker (AMM), they can act as liquidity providers to facilitate trade. Consequently, yield farming presents consumers with both passive and active methods to utilize their funds that they would not otherwise have access to.
The first organized and user-friendly platform for Ethereum scaling and infrastructure development is referred to as Polygon. The groundwork of it is Polygon SDK, a modular, flexible framework that simplifies the creation and linking of Standalone Chains, like Polygon POS, designed to be adaptable and independent, and safe chains, such as Optimistic Rollups, Plasma, zkRollups, Validium, etc. Polygon’s scaling solutions have been extensively utilized on a daily basis, with over 500 Dapps, 567+ Million transactions, and more than 6 million daily transactions.
Below is a step-by-step guide on how to generate yield on Aave using Polygon network.
1: visit: https://app.aave.com
2: Connect to its Polygon market to start yield farming.
3: Confirm that you are on the Polygon Mainnet and link your wallet by selecting the connect button.
4: Choose the asset you wish to deposit from the list.
5: Click on the asset of your preference to observe market data, encompassing supply and borrowing totals as well as crucial metrics like the utilization ratio.
Moreover, you may discover the maximum loan-to-value, or LTV, indicating the collateral asset’s maximum borrowing capacity.
Step 6: To initiate a deposit, simply click the “deposit” button on the right.
Securing a loan using your assets as security
7 (Optional): Pick the asset you want to borrow for by visiting Aave’s “Borrow” page.
8 (Optional): You can borrow against your deposited assets using the Aave protocol and pay minimal interest on the loan; utilize the maximum LTV (loan-to-value) as a reference.
Before making the deposit, it’s essential to be aware of these points:
Health Factor: It is based on the ratio of collateral to the loan amount, the health factor indicates how secure your loan is. Sustain it over 1 to prevent Liquidation. A 1.5 health factor would be optimal and secure.
Maximum loan-to-value ratio: Representing the maximum borrowing capacity of a given piece of collateral is the Maximum Loan-to-Value ratio, or Max LTV.
The liquidation threshold: It is the level in which a borrowing position becomes eligible for liquidation for each collateral, marking it as undercollateralized. In the event that the debt value of the collateral attains 80% of its total value, the loan is subject to liquidation. For example, if the collateral possesses an 80% liquidation threshold, the loan will be liquidated.
Liquidation Penalties: liquidators reimburse the borrower for all or a portion of the remaining loan balance in In the event of liquidation. They can acquire the collateral at a reduced price, retaining the difference as a bonus!
APR and APY: APR is the annual percentage rate applied to loans or earnings. Firstly, annual percentage yield, or APY, accounts for compound interest, but annual percentage rate, or APR, does not.
Flexible Interest Rates
The interest rate strategy on the Aave platform is calibrated to provide maximum performance optimization and reduce risk. Interest rates on loans depend on the utilization rate of a particular cryptocurrency. It is based on the indicator of the presence of cryptocurrency in the pool:
If there are enough funds, then low rates are set, which stimulate lending.
If funds are scarce, high rates are set for liquidity providers to encourage them to invest capital.
A nice feature of Aave is the ability to switch at will between fixed and variable interest rates, choosing the most profitable option at a particular moment. Thanks to this flexible structure, Aave has been in high demand since its deployment. Fixed interest rates are not exactly fixed, but rather simply more stable and less susceptible to market fluctuations.
At The End
There is a real revolution going on in the Yield Farming economy and Aave can play an important role in its continued development by helping anyone take advantage of the opportunities available and earn money. Aave is an Open Source Protocol to create Non-Custodial Liquidity Markets to earn interest on supplying and borrowing assets with a variable or stable.
The Aave protocol is one of the most popular in the DeFi lending industry today. This is due to the large selection of cryptocurrencies, support for many wallets for connection, and a flexible system of interest rates. The smart contract mechanism allows you to avoid many risks and inconveniences that are inevitable when interacting with traditional banks.