{"id":2749,"date":"2023-01-17T07:03:09","date_gmt":"2023-01-17T07:03:09","guid":{"rendered":"https:\/\/www.rocketx.exchange\/blog\/?p=2749"},"modified":"2023-03-15T06:06:54","modified_gmt":"2023-03-15T06:06:54","slug":"yield-farming-overview-and-guide","status":"publish","type":"post","link":"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/","title":{"rendered":"Yield Farming Overview and Guide"},"content":{"rendered":"<p>[et_pb_section fb_built=&#8221;1&#8243; _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; custom_margin=&#8221;-30px|||||&#8221; custom_padding=&#8221;1px|||||&#8221; global_colors_info=&#8221;{}&#8221;][et_pb_row _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; custom_padding=&#8221;2px||19px|||&#8221; global_colors_info=&#8221;{}&#8221;][et_pb_column type=&#8221;4_4&#8243; _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221;][et_pb_image src=&#8221;https:\/\/www.rocketx.exchange\/blog\/wp-content\/uploads\/2023\/01\/Yield-Farming-01.png&#8221; alt=&#8221;what is yield farming?&#8221; title_text=&#8221;yield farming overview and guide&#8221; _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221;][\/et_pb_image][et_pb_code _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221;]<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_69_1 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#What_is_Yield_Farming\" title=\"What is Yield Farming?\">What is Yield Farming?<\/a><ul class='ez-toc-list-level-2' ><li class='ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#What_is_APY_or_APR\" title=\"What is APY or APR?\u00a0\">What is APY or APR?\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#How_Does_Yield_Farming_Work\" title=\"How Does Yield Farming Work?\">How Does Yield Farming Work?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#What_are_liquidity_pools_LPs_and_liquidity_providers\" title=\"What are liquidity pools (LPs) and liquidity providers?\">What are liquidity pools (LPs) and liquidity providers?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#How_do_liquidity_pools_work\" title=\"How do liquidity pools work?\">How do liquidity pools work?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#How_to_provide_liquidity_to_a_pool\" title=\"How to provide liquidity to a pool?\">How to provide liquidity to a pool?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Why_provide_liquidity\" title=\"Why provide liquidity?\">Why provide liquidity?<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Compounding_with_LP_Tokens\" title=\"Compounding with LP Tokens\">Compounding with LP Tokens<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Earn_Fee\" title=\"Earn Fee\u00a0\">Earn Fee\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Leveraged_Lending\" title=\"Leveraged Lending\u00a0\">Leveraged Lending\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Get_Governance_Tokens_as_rewards_liquidity_mining\" title=\"Get Governance Tokens as rewards (liquidity mining)\">Get Governance Tokens as rewards (liquidity mining)<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Risks_in_Yield_Farming\" title=\"Risks in Yield Farming\">Risks in Yield Farming<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Ending_Thoughts\" title=\"Ending Thoughts\">Ending Thoughts<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n[\/et_pb_code][et_pb_text _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; text_text_color=&#8221;#000000&#8243; custom_padding=&#8221;||1px||false|false&#8221; global_colors_info=&#8221;{}&#8221;]<\/p>\n<p><span style=\"font-weight: 400;\">Decentralized Finance (DeFi) has erupted into a <\/span><strong><a href=\"https:\/\/defillama.com\/\" target=\"_blank\" rel=\"noopener\">~$90 billion industry<\/a><\/strong><span style=\"font-weight: 400;\"><strong>,<\/strong> sparking a wave of global disruption. One of the catalysts for this exponential growth is an <strong>ROI<\/strong>-optimizing strategy called \u201c<strong>yield farming<\/strong>\u201d &#8211; a way to make or generate returns on your crypto assets by putting them to work.\u00a0<\/span><\/p>\n<p><strong>Work? Where? How?<\/strong><\/p>\n<p>To understand yield farming, you have to first understand a few key terms:<\/p>\n<ol>\n<li><span style=\"font-weight: 400;\"> What does yield mean and APY<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> How does yield farming work?<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> What liquidity pools are and how do they work?<\/span><\/li>\n<li><span style=\"font-weight: 400;\"> Risks<\/span><\/li>\n<\/ol>\n<p><strong>In this guide, we will explain it all.<\/strong><\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; text_text_color=&#8221;#000000&#8243; custom_padding=&#8221;||0px|||&#8221; global_colors_info=&#8221;{}&#8221;]<\/p>\n<h1><span class=\"ez-toc-section\" id=\"What_is_Yield_Farming\"><\/span><span style=\"font-size: xx-large;\"><strong>What is Yield Farming?<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h1>\n<p>Yield farming comprises two words:\u00a0<\/p>\n<p><span style=\"font-weight: 400;\">1. \u201c<strong>Yield<\/strong>\u201d is what you get for investing.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">2. \u201c<strong>Farming<\/strong>\u201d represents the possible exponential growth that you can receive by finding the right place to invest. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">To put it into perspective: when you deposit your money into a bank account, the bank pays you interest. For example, most banks in the US pay $1 on every $1000 deposited. The dollar that you get for investing $1000 in your bank is the yield. Now, you can take that $1000, lock it into a fixed deposit for a specific period, and earn 3.5% on your investment. Or, you can use the same $1000 in a different investment scheme.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This is called \u201c<strong>farming<\/strong>\u201d, which is finding the best strategies to optimize your investment returns.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In the DeFi world, yields are a lot better than what the traditional financial institutions offer, primarily because no mediator exists that can eat up the earned interest. All a user needs to do is lend crypto assets to the most optimized spots so that it can earn you even more free crypto, usually in the form of additional governance or LP tokens.\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; text_text_color=&#8221;#000000&#8243; custom_margin=&#8221;-41px|||||&#8221; global_colors_info=&#8221;{}&#8221;]<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_is_APY_or_APR\"><\/span><span style=\"font-size: x-large;\"><strong>What is APY or APR?\u00a0<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Yield farming returns are typically calculated annualized, which is an estimate of the return you can expect over a year.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The most commonly used metrics for Yield Farming are <strong>Annual Percentage Yield (APY<\/strong>) and <strong>Annual Percentage Rate (APR)<\/strong>. While APY takes the effect of compounding into account, APR doesn&#8217;t. Compounding here is referred to as directly reinvesting profits to generate more returns.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, keep two things in mind: 1) many protocols use both APR and APY interchangeably, and 2) these metrics are only an estimate or projection of what you can earn in a year.<\/span><\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; text_text_color=&#8221;#000000&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<h2><span class=\"ez-toc-section\" id=\"How_Does_Yield_Farming_Work\"><\/span><span style=\"font-size: x-large;\">How<strong> Does Yield Farming Work?<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">In many cases, yield farming works with liquidity providers that deposit funds to liquidity pools (LPs).\u00a0<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_are_liquidity_pools_LPs_and_liquidity_providers\"><\/span><span style=\"font-size: x-large;\"><strong>What are liquidity pools (LPs) and liquidity providers?<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Liquidity<span style=\"font-weight: 400;\"> is a term that refers to how easily you can convert your cryptocurrencies to cash (or other crypto assets) without hurting the market price. For example, a highly liquid market would let you sell $100,000 worth of crypto at one price. Whereas an illiquid market would not have enough buy orders at one price to fill $100,000. Instead, your $100,000 sell order would break down to different buy orders on the order book, lowering the price. This is called slippage and is expected to an extent, but the more liquid a market, the more efficient it is and easy to buy or sell.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">On a centralized exchange like Coinbase, buyers or sellers provide liquidity by placing orders. Buyers state the price for which they are willing to buy a cryptocurrency, and sellers state the price for which they want to sell that cryptocurrency. Coinbase prepares an order sheet, matches buyers\u2019 prices with sellers\u2019 and facilitates the trade.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But, in a decentralized exchange (DEX) like Uniswap, there is not an order matching engine connecting buyers and sellers each second, mainly because Ethereum\u2019s layer 1 cannot support this transaction load.<\/span><\/p>\n<p>It\u2019s done through the help of liquidity pools.\u00a0<\/p>\n<p><span style=\"font-weight: 400;\">Liquidity pools are smart contracts that contain two cryptocurrencies to help facilitate transactions quickly and effortlessly. They are pre-funded. Therefore, for the buyer to buy, there need not have to be a seller at that particular moment, only sufficient liquidity in the pool. The underlying smart contract of the liquidity pool manages the trade automatically, without any human intervention.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, the liquidity has to come from somewhere. It comes from Liquidity Providers (LPs) who deposit liquidity (in the form of crypto assets) in a pool to create a market.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_do_liquidity_pools_work\"><\/span><span style=\"font-size: x-large;\"><strong>How do liquidity pools work?<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Liquidity pools use the constant product formula <strong>(x*y = k )<\/strong> to mathematically determine the market price of a token in that pool.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While x and y represent the token balance of a pair, k is a constant that doesn&#8217;t change in value. Let&#8217;s use the USDT-ETH pool as an example to find the price of a token.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Say the USDT-ETH pool has 10 ETH and 1,000 USDT, and the current value of ETH is $100 and USDT is $1. Now, if you want to buy 2 ETH, let&#8217;s see how much USDT you would have to pay in this pool.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">x*y = k<\/span><\/p>\n<p><span style=\"font-weight: 400;\">x = ETH , y = USDT<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Total Pool Value: ETH * USDT<\/span><\/p>\n<p><span style=\"font-weight: 400;\">: 10 * 1,000 = 10,000<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now, you want to buy 2 ETH from the pool.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">(10-2)ETH * (1000+y)USDT = 10,000<\/span><\/p>\n<p><span style=\"font-weight: 400;\">(8)ETH * (1000+y)USDT = 10,000<\/span><\/p>\n<p><span style=\"font-weight: 400;\">(1000+y)USDT = 10,000\/8<\/span><\/p>\n<p><span style=\"font-weight: 400;\">(1000 +y)USDT = 1250<\/span><\/p>\n<p><span style=\"font-weight: 400;\">y(USDT) = 1250 &#8211; 1000<\/span><\/p>\n<p><span style=\"font-weight: 400;\">y (USDT) = 250<\/span><\/p>\n<p><span style=\"font-weight: 400;\">When you buy 2 ETH, you are essentially withdrawing 2 ETH out of the pool and depositing some USDT into the pool. So, ETH(x) would decrease and USDT(y) would increase.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The smart contract automatically computes y to determine the price you need to pay, which in this case is $250 for borrowing 2 ETH.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">After you have made the transaction, the liquidity pool would have 8 ETH and $1250.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This formula is also the foundation of how <strong><a href=\"https:\/\/www.rocketx.exchange\/blog\/what-is-a-decentralized-exchange-how-it-works\/\" target=\"_blank\" rel=\"noopener\">Automated Market Makers (AMM)<\/a> <\/strong>work. Uniswap, for example, is an <a href=\"https:\/\/www.rocketx.exchange\/blog\/what-is-a-decentralized-exchange-how-it-works\/\">AMM<\/a> that uses the x*y = k formula to price assets in different liquidity pools.\u00a0<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_to_provide_liquidity_to_a_pool\"><\/span><span style=\"font-size: x-large;\"><strong>How to provide liquidity to a pool?<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">In the DeFi industry, anyone can become a liquidity provider by adding trading pair tokens into the pool. However, you&#8217;d need to add both tokens in a 50:50 ratio. For example,\u00a0 if you want to add $1000 worth of liquidity to the ETH-USDT pool, you\u2019d need $500 worth of both ETH and USDT.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Liquidity providers must follow this standard to ensure that the pool always maintains a 50-50 mix of token x and token y.\u00a0<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Why_provide_liquidity\"><\/span><span style=\"font-size: x-large;\"><strong>Why provide liquidity?<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Why would someone provide liquidity to those pools? What is the benefit?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The short answer is \u201c<strong>yield farming<\/strong>&#8221; The better answer is long. Read on!<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Compounding_with_LP_Tokens\"><\/span><span style=\"font-size: medium;\"><strong>Compounding with LP Tokens<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">When you provide liquidity into a pool, you receive LP tokens in exchange. These tokens act as a receipt, which you can use to claim your original funds. For example, when you provide liquidity to the ETH-USDC pool on Uniswap, you\u2019ll receive ETH-USDC LP tokens, denoting your share of the pool. You will find these tokens in the wallet you used while providing liquidity. If you don&#8217;t, you might need to add the smart contract address of the LP token to your wallet. You can perform three activities with these tokens:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\">Use them to retrieve your deposit and the interest earned.<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Use them as collateral in a loan &#8211; LP tokens provide ownership of an underlying asset, thereby allowing you to use them as collateral. However, to make sense of it, we must first understand how borrowing happens in DeFi:<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">When it comes to borrowing crypto, all loans are overcollateralized. It means if you want to take a loan, you must provide more money than the loan is worth. For example, if you want to take out $1k worth of USDC, you must deposit $1500 (depending upon the protocol) worth of ETH. This may sound surprising but it\u2019s the only way (as of now) that protocols like Compound ensure that the borrower always repays the loan.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In this case, you can use your LP tokens as collateral to get a loan. What you can do with this loan is explained later in Leveraged Lending!<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Use them to compound your yield &#8211; A popular way to farm yield with LP tokens is by depositing them in a yield compounder. These protocols regularly harvest rewards for you and even purchase more of the token pair, which are staked back in liquidity pools to compound your interest. <\/span>\u00a0<\/li>\n<\/ul>\n<h4><span class=\"ez-toc-section\" id=\"Earn_Fee\"><\/span><span style=\"font-size: medium;\"><strong>Earn Fee\u00a0<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">Decentralized exchanges charge a fee for each transaction occurring on the platform. Uniswap, for example, charges 0.3% on each transaction. Instead of keeping these fees, the exchange divides them among the liquidity providers, proportional to their shares of liquidity.\u00a0<\/span><\/p>\n<p><strong>To simplify it, let\u2019s say:<\/strong><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You deposit $1000 worth of ETH and USDC into a $100k worth of ETH-USDC pool. Therefore, you own a 1% share of that pool.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">If in a single day, $1 million gets traded back and forth on Uniswap between ETH and USDC, the platform makes $300k worth of fees (as per 0.3%\/transaction).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Since you own 1% of the pool, you\u2019ll make $30 per day for adding $1k on Uniswap. <\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The $30 you earn is the yield that you earn for providing liquidity or for being an LP on Uniswap.\u00a0<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Leveraged_Lending\"><\/span><span style=\"font-size: medium;\"><strong>Leveraged Lending\u00a0<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">It\u2019s popularly known as \u201c<strong>lending on steroids<\/strong>\u201d because users can leverage one token to receive a loan of another token and then use that borrowed token to farm yield. Not only do you earn interest on the tokens provided as liquidity, but can also use the borrowed tokens to reinvest and farm more yield. Sounds confusing?\u00a0<\/span><\/p>\n<p><strong>To simplify it,<\/strong><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Suppose Compound offers 20% APY on ETH deposits, and you have $10k ETH in your wallet.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You deposit it into Compound and take $8k worth of loan in USDC.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You go to a decentralized exchange, swap those USDC with (say)$8k worth of ETH, and resupply it back to the Compound protocol.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">So, let\u2019s say you get $8k worth of ETH, which when deposited for another loan would give you $5k worth of USDC.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">You can repeat the process, buy more ETH, and redeposit it. By the end of three iterations, you&#8217;ll have almost $23k worth of ETH earning you 30% APY.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The important part to learn is that you only initially had $10k, but now you are earning 30% interest on $23k worth of assets.\u00a0<\/span><\/li>\n<\/ul>\n<h4><span class=\"ez-toc-section\" id=\"Get_Governance_Tokens_as_rewards_liquidity_mining\"><\/span><span style=\"font-size: medium;\"><strong>Get Governance Tokens as rewards (liquidity mining)<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">Governance tokens give their holders the right to vote on changes or issues that govern the operations or development of the issuing protocol. Instead of putting these tokens in the market, most protocols give them as a reward to users who put their tokens into a liquidity pool, distributed proportionally to their share of the pool.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In some cases, you will be able to deposit governance tokens into another pool to earn a return. In other cases, you can use them to put forward a formal governance proposal.<\/span><\/p>\n<p>&nbsp;<\/p>\n<p>[\/et_pb_text][\/et_pb_column][\/et_pb_row][et_pb_row column_structure=&#8221;1_2,1_2&#8243; _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; custom_margin=&#8221;-52px|auto||auto||&#8221; global_colors_info=&#8221;{}&#8221;][et_pb_column type=&#8221;1_2&#8243; _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221;][et_pb_button button_url=&#8221;https:\/\/t.me\/RocketXexchange&#8221; url_new_window=&#8221;on&#8221; button_text=&#8221;Join Our Telegram&#8221; _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;05fec754-b9ad-4caf-9e84-fc40bbabff89&#8243; global_colors_info=&#8221;{}&#8221;][\/et_pb_button][\/et_pb_column][et_pb_column type=&#8221;1_2&#8243; _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221;][et_pb_button button_url=&#8221;https:\/\/twitter.com\/RocketXexchange&#8221; url_new_window=&#8221;on&#8221; button_text=&#8221;Follow Us On Twitter&#8221; _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;05fec754-b9ad-4caf-9e84-fc40bbabff89&#8243; global_colors_info=&#8221;{}&#8221;][\/et_pb_button][\/et_pb_column][\/et_pb_row][et_pb_row _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221;][et_pb_column type=&#8221;4_4&#8243; _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; global_colors_info=&#8221;{}&#8221;][et_pb_text _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; text_text_color=&#8221;#000000&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Risks_in_Yield_Farming\"><\/span><span style=\"font-size: x-large;\"><strong>Risks in Yield Farming<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">While Yield Farming is one of the ways to earn high rewards, it is a high-risk adventure that has several pitfalls. For DeFi to grow and for an investor to avoid losses, we must understand various risks associated with Yield Farming.\u00a0<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><strong>Impermanent Loss<\/strong><b>: <\/b><span style=\"font-weight: 400;\">As discussed earlier, LPs provide liquidity to liquidity pools. During this time, if the assets go up or down in value, the impermanent loss takes place. Let&#8217;s understand it with an example:<\/span><\/li>\n<\/ol>\n<p><span style=\"font-weight: 400;\">Suppose you deposit 10 ETH and 10k USDC in a liquidity pool. Since the deposited token pair needs to be equivalent, it means that the price of 1 ETH is 1000 USDC. Let&#8217;s say that you deposit it into a pool that has a total asset value of 100,000 USDC (50 ETH and 50 USDT), which means your share in the pool is 20% (10 ETH and 10k USDC).\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Now, suppose that the price of ETH increases to 2000 USDC. When it happens, arbitrators will remove ETH and add more USDC to the pool to match the price ratio. Therefore, the pool will now have 35 ETH and 70,710 USDC. Since you are entitled to a 20% share of the pool, you can withdraw 7 ETH and 14,142 USDC, totaling 28,142 USDC. That&#8217;s a nice profit! But, what if you would have simply held your 10 ETH and 10k USDC? You would have made $30k USDC.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">*Formulas are taken from <\/span><a href=\"https:\/\/www.youtube.com\/watch?v=O5TK7leoIps\" target=\"_blank\" rel=\"noopener\"><span style=\"font-weight: 400;\"><strong>Amarpreet Singh<\/strong> .<\/span><\/a><\/p>\n<p><span style=\"font-weight: 400;\">It shows that you could have been better off by holding your assets rather than adding them to a liquidity pool. This is what we call impermanent loss.\u00a0\u00a0<\/span><\/p>\n<p>&nbsp;<\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; text_text_color=&#8221;#000000&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<p>2<b>. <\/b><strong>Smart Contract Risks<\/strong><b>:<\/b><span style=\"font-weight: 400;\"> DeFi is open to everyone, meaning everyone can create a DeFi smart contract and deploy it on a blockchain. Since anyone can develop, it increases the risks of bugs in a protocol. Though various projects audit their smart contracts before deploying them, vulnerabilities are discovered from time to time. Due to the immutability of blockchains, a broken smart contract can lead to a loss of funds.\u00a0<\/span><\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; text_text_color=&#8221;#000000&#8243; global_colors_info=&#8221;{}&#8221;]<\/p>\n<p>3.<strong>Composability:<\/strong> <span style=\"font-weight: 400;\">One of the biggest advantages of DeFi, composability, is also one of its greatest risks. We talked about LP tokens and how we can use them to farm yield on other protocols. That\u2019s the beauty of DeFi; protocols can seamlessly integrate. But, it\u2019s also a problem. What if one of the protocols fails? All those dependent on it will suffer. This poses a great risk to yield farmers who not only have to trust the protocol they are providing liquidity to but also others that it relies on.\u00a0<\/span><\/p>\n<p>[\/et_pb_text][et_pb_text _builder_version=&#8221;4.18.1&#8243; _module_preset=&#8221;default&#8221; text_text_color=&#8221;#000000&#8243; hover_enabled=&#8221;0&#8243; global_colors_info=&#8221;{}&#8221; sticky_enabled=&#8221;0&#8243;]<\/p>\n<h4><span class=\"ez-toc-section\" id=\"Ending_Thoughts\"><\/span><strong>Ending Thoughts<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">This concept of lending for interest has been around for as long as banks have existed. Yield Farming is an improved version that presents an excellent opportunity for investors to make a profit (in the form of new crypto) by lending their assets.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">While it\u2019s possible to make high returns by staking or providing liquidity, doing so is highly risky, especially if you are new to the industry. Plus, due to the open nature of DeFi, there is no way to regulate protocols that offer the Yield Farming opportunity. Therefore, if you fall into any of the pitfalls of Yield Farming, there is no way to hold someone accountable for the loss.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, these risks can be managed if individuals gain enough knowledge, evaluate risks, and conduct their research before experimenting with protocols that allow them to farm yield. Nonetheless, it all boils down to a perfectly balanced expression: high rewards often come with high risks.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you find it interesting, please check out our <a href=\"https:\/\/www.rocketx.exchange\/blog\" target=\"_blank\" rel=\"noopener\"><strong>blog section<\/strong><\/a>, which has both DIY and educational blogs.<\/span><\/p>\n<p>[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>\n","protected":false},"excerpt":{"rendered":"<p><div id=\"ez-toc-container\" class=\"ez-toc-v2_0_69_1 counter-hierarchy ez-toc-counter ez-toc-transparent ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-1'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#What_is_Yield_Farming\" title=\"What is Yield Farming?\">What is Yield Farming?<\/a><ul class='ez-toc-list-level-2' ><li class='ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#What_is_APY_or_APR\" title=\"What is APY or APR?\u00a0\">What is APY or APR?\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#How_Does_Yield_Farming_Work\" title=\"How Does Yield Farming Work?\">How Does Yield Farming Work?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#What_are_liquidity_pools_LPs_and_liquidity_providers\" title=\"What are liquidity pools (LPs) and liquidity providers?\">What are liquidity pools (LPs) and liquidity providers?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#How_do_liquidity_pools_work\" title=\"How do liquidity pools work?\">How do liquidity pools work?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#How_to_provide_liquidity_to_a_pool\" title=\"How to provide liquidity to a pool?\">How to provide liquidity to a pool?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Why_provide_liquidity\" title=\"Why provide liquidity?\">Why provide liquidity?<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Compounding_with_LP_Tokens\" title=\"Compounding with LP Tokens\">Compounding with LP Tokens<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Earn_Fee\" title=\"Earn Fee\u00a0\">Earn Fee\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Leveraged_Lending\" title=\"Leveraged Lending\u00a0\">Leveraged Lending\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Get_Governance_Tokens_as_rewards_liquidity_mining\" title=\"Get Governance Tokens as rewards (liquidity mining)\">Get Governance Tokens as rewards (liquidity mining)<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Risks_in_Yield_Farming\" title=\"Risks in Yield Farming\">Risks in Yield Farming<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/www.rocketx.exchange\/blog\/yield-farming-overview-and-guide\/#Ending_Thoughts\" title=\"Ending Thoughts\">Ending Thoughts<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\nDecentralized Finance (DeFi) has erupted into a ~$90 billion industry, sparking a wave of global disruption. One of the catalysts for this exponential growth is an ROI-optimizing strategy called \u201cyield farming\u201d &#8211; a way to make or generate returns on your crypto assets by putting them to work.\u00a0 Work? Where? How? To understand yield farming, [&hellip;]<\/p>\n","protected":false},"author":8,"featured_media":2768,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"","_et_gb_content_width":"","rank_math_lock_modified_date":false,"footnotes":""},"categories":[157],"tags":[176,175,395,394,174,65,155,397,398,390,177,178,179,391,392,388,173,389,396,393],"class_list":["post-2749","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-academy","tag-apr","tag-apy","tag-best-yield-farming-crypto","tag-crypto-yield-farming","tag-cryptocurrency","tag-decentralized-exchange","tag-defi","tag-defi-yield-farming","tag-farm-yield","tag-farm-yielding","tag-how-yield-farming-work","tag-liquidity","tag-liquidity-pools","tag-what-is-yield-farming","tag-yield-farm","tag-yield-farmer","tag-yield-farming","tag-yield-farming-crypto","tag-yield-farming-vs-staking","tag-yield-farms","et-has-post-format-content","et_post_format-et-post-format-standard"],"_links":{"self":[{"href":"https:\/\/www.rocketx.exchange\/blog\/wp-json\/wp\/v2\/posts\/2749"}],"collection":[{"href":"https:\/\/www.rocketx.exchange\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.rocketx.exchange\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.rocketx.exchange\/blog\/wp-json\/wp\/v2\/users\/8"}],"replies":[{"embeddable":true,"href":"https:\/\/www.rocketx.exchange\/blog\/wp-json\/wp\/v2\/comments?post=2749"}],"version-history":[{"count":28,"href":"https:\/\/www.rocketx.exchange\/blog\/wp-json\/wp\/v2\/posts\/2749\/revisions"}],"predecessor-version":[{"id":2803,"href":"https:\/\/www.rocketx.exchange\/blog\/wp-json\/wp\/v2\/posts\/2749\/revisions\/2803"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.rocketx.exchange\/blog\/wp-json\/wp\/v2\/media\/2768"}],"wp:attachment":[{"href":"https:\/\/www.rocketx.exchange\/blog\/wp-json\/wp\/v2\/media?parent=2749"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.rocketx.exchange\/blog\/wp-json\/wp\/v2\/categories?post=2749"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.rocketx.exchange\/blog\/wp-json\/wp\/v2\/tags?post=2749"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}