![\"Yield](\"https:\/\/i0.wp.com\/aayushbhaskar.com\/wp-content\/uploads\/2022\/06\/Yield-Farming-Example-2.jpg?resize=800%2C600&ssl=1\")
<\/p>\nThe Crypto market is in a bearish cycle. There are now no two ways about it. <\/span><\/p>\n
$BTC is down more than 60% & most of your favorite altcoins have had a 90% drawdown from peak levels. <\/span><\/p>\n
However, that doesn’t mean that you as an investor should lose hope, pack up and go home. Bear markets are great to accumulate & prepare for the next bull cycle. <\/span><\/p>\n
One such strategy is yield farming, and I decided to write a beginner’s guide to educate all of you on how you can profit from this.\u00a0<\/span><\/p>\n
Yield farming is a collection of strategies used in decentralized finance (DeFi) that create more cryptocurrency from your existing holdings. <\/span><\/p>\n
This is a return maximization strategy that aims to enhance yield.\u00a0<\/span><\/p>\n
<\/p>\n
There are primarily three yield farming<\/a> strategies:\u00a0<\/span><\/p>\n Every time you interact with a decentralized exchange (DEX<\/a>) you are assured that the coin you want to swap into shall have a ready counterparty on the other side willing to sell. <\/span><\/p>\n This is ensured by the DEX through the use of liquidity pools, where holders of various cryptocurrencies lock their holdings and earn passive income in return.\u00a0<\/span><\/p>\n So, for example, a $DOT<\/a> liquidity pool would have holders contributing their holdings of $DOT & a counter asset, say $USDT<\/a>, to the pool to facilitate trading on a DEX. In return, the liquidity provider shall earn a percentage of the trading fee, which may be paid in a third cryptocurrency or new LP Tokens.\u00a0<\/span><\/p>\n This is fairly simple. As a holder of a cryptocurrency, say $ATOM<\/a>, you lend your holdings to borrowers through a smart contract and earn interest. The interest may be paid in $ATOM or a third cryptocurrency.\u00a0<\/span><\/p>\n This is also a fairly simple strategy. As a holder of a cryptocurrency, say $LINK<\/a>, you deposit your holdings with a platform through a smart contract. You then borrow another cryptocurrency, say $ETH<\/a>, using your $LINK holdings as collateral. <\/span><\/p>\n The subsequent increase in the price of $LINK will continue to benefit you whereas you may farm the borrowed $ETH for additional yield by providing liquidity or lending to earn interest.\u00a0<\/span><\/p>\n A typical yield farming strategy may involve one or more of the aforesaid strategies used in conjunction. Let’s try and work through an example below:\u00a0<\/span><\/p>\n To recap, Mario has borrowed $USDT against his $ETH holdings at 7% and used the borrowed cryptocurrency to earn additional LP tokens by locking them up in a liquidity pool at 15%. HE trades these LP tokens for $USDT which he uses to buy more $ETH. However, is the strategy profitable?\u00a0<\/span><\/p>\n Let’s run a few scenarios assuming a year has passed. Also, we assume that LP tokens are issued and interest is due at the end of one year. Mind you, this is a simplistic assumption as this is done on a daily basis.\u00a0\u00a0<\/span><\/p>\n Our simplistic examples highlight how in each scenario our protagonist, Mario, is able to reduce cost or increase his overall profitability on the $ETH trade. That being said, yield farming has its share of risks.\u00a0<\/span><\/b><\/p>\n Yield farming is an interesting proposition to utilize your idle crypto assets to generate additional returns. In a down-trending market, it could also help you average down without spending more capital. <\/span><\/p>\n However, the DeFi sector is prone to certain risks that a prospective yield farmer should be cognizant of. <\/span><\/p>\n The volatility in Crypto markets means that our simplistic examples may not always hold & rates of return, which are a function of demand and supply, may change adversely.\u00a0<\/span><\/p>\n The Crypto market is in a bearish cycle. There are now no two ways about it. $BTC is down more than 60% & most of your favorite altcoins have had a 90% drawdown from peak levels. However, that doesn’t mean that you as an investor should lose hope, pack up and go home. Bear markets …<\/p>\n\n
2.1. Liquidity Providers<\/b><\/h3>\n
2.2 Lending<\/b><\/h3>\n
2.3. Borrowing<\/b><\/h3>\n
3. Yield Farming in Action<\/b><\/h2>\n
![\"Yield](\"https:\/\/i0.wp.com\/aayushbhaskar.com\/wp-content\/uploads\/2022\/06\/Yield-Farming-Example-1.jpg?resize=800%2C600&ssl=1\")
3.1. $ETH Price Falls to $1,500:\u00a0<\/b><\/h3>\n
\n
3.2. $ETH Price Increases to $2,500:\u00a0<\/b><\/h3>\n
\n
4. Risks of Yield Farming<\/b><\/h2>\n
\n
5. Concluding Note<\/b><\/h2>\n
![\"\"](\"https:\/\/i0.wp.com\/aayushbhaskar.com\/wp-content\/uploads\/2022\/06\/Yield-Farming-Explained-for-Beginners.png?w=800&ssl=1\")
","protected":false,"gt_translate_keys":[{"key":"rendered","format":"html"}]},"excerpt":{"rendered":"![\"\"](\"https:\/\/aayushbhaskar.com\/wp-content\/uploads\/2022\/06\/Yield-Farming-Explained-for-Beginners.png\")
","protected":false,"gt_translate_keys":[{"key":"rendered","format":"html"}]},"author":9,"featured_media":7958,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_genesis_hide_title":false,"_genesis_hide_breadcrumbs":false,"_genesis_hide_singular_image":false,"_genesis_hide_footer_widgets":false,"_genesis_custom_body_class":"","_genesis_custom_post_class":"","_genesis_layout":"","footnotes":""},"categories":[112],"tags":[239,238],"jetpack_sharing_enabled":true,"jetpack_featured_media_url":"https:\/\/aayushbhaskar.com\/wp-content\/uploads\/2022\/06\/Yield-Farming-Explained-for-Beginners.png","acf":[],"yoast_head":"\n