BEGINNING WITH CRYPTOCURRENCY
So you’ve heard about the wonders of yield farming in the cryptocurrency world, but you aren’t sure what it is. Or maybe you are a little familiar and want to learn more about it. The mantra in the crypto world is “do your own research” after all, right? You’ve come to the right place! We’ll have a simplified breakdown of the terms involved in yield farming, along with some examples and how-tos for getting you started, comfortable, and on your way to passive income!
Getting started is, at least to me, the hardest part. When I first entered the cryptocurrency world, I had no idea what anything meant. I had no idea how the market (or how ANY market, for that matter) worked. I wasn’t sure what the difference was between bitcoin and stablecoins and altcoins and memecoins. I had even less of an idea on how to buy anything to foray into this new technology.
So, let’s begin with a popular first step:
Finding yourself an exchange
There are a lot of well-known, broadly advertised exchanges out there. We will begin with one particularly well-known exchange, Coinbase.
You will see this exchange advertised just about everywhere, from in-game ads to commercials. They have two different versions, that work on the same principles and have a plethora of interchangeable assets but operate slightly differently. The basic version is called just Coinbase, and it is filled with legible graphs on coin and token performance, sorted pages where you can view your portfolio, purchase history, wallet contents, and more.
They are constantly listing new cryptocurrencies, and as their list grows so do the opportunities to earn free money via their quizzes. Their other version is called Coinbase Pro, which offers some features that a more seasoned trader would find beneficial.
They have the ability to set limit sell and buy orders, view charts with candles, and have a lower transaction fee rate than their counterpart.
Coinbase does enable quite a low barrier to entry for newer users, but keep in mind that although you have a wallet through them, the keys are not yours to keep.
The saying around this is “Not your keys, not your coins” which in short means you don’t truly own what you buy. It is like paying full price for something at a store, but you have to leave the item there. You have full ownership of it in the store; however, the storeowner has possession until you decide to take the item home. You can transfer your assets to another wallet if you desire, and that will be discussed later.
There are plenty of other exchanges you can use, which will be up to your discretion. Like we said before, DYOR. Popular alternatives include Binance, Kraken, Kucoin, Gemini, and Uphold. They each have their advantages, limitations, custodianship, and specific rules you should familiarize yourself with before jumping in.
OVERVIEW OF COMMON TERMINOLOGY
Before pressing forward, it is important to understand some key terms that will appear ubiquitously in the yield farming world. We will start with defining what a lot of this particular is trying to achieve: decentralized finance.
Decentralized finance, DeFi, is a term used to oppose the world commonly known as traditional finance, TradFi or CeFi (centralized finance). What exactly does decentralized finance mean? As opposed to traditional finance, DeFi aims for true user-based decentralization of funds.
It is run on public blockchains, as a source of trust and governance. TradFi typically rely on local governments and less-than localized banks, with entities that control the rules over all its users.
DeFi is open-sourced and has a relatively low barrier to entry, with resources literally guiding newcomers on how to build their own tokens, applications, and anything related to the field.
Compared to a bank where your accounts are managed by bank employees with their own rules, decentralized finance applications allow you to use your accounts freely without any restrictions. You don’t have to show documents. You don’t have to ask for permission to get loans, essentially you’re free to choose and act.
Most importantly, the government is not involved so you won’t have your account funds suddenly locked or lose them entirely for some government intenvention. In DeFi, freedom and control are the priority. Your finances are your prerogative.
Organizations that run their own DeFi projects are called DAOs or Decentralized Autonomous Organizations. They are not controlled by any one entity, but rather by the computers, networks, and nodes that they are run on.
DAOs have a degree of separation from human interference, allowing users a great degree of freedom and anonymity, along with mitigating human error and manipulation of investor funds.
DAOs operate exclusively through smart contracts, which are pieces of code written to execute when specific conditions are met, to communicate from their dApp to the blockchain.
The next topic to cover is what a dApp, or decentralized app, is. Simply put, dApps are decentralized applications. They are interfaces that interact with smart contract, constantly updating and reading data from the blockchain itself!
They often use some form of cryptocurrency token for access and rewards to participate. The dApp must use its own blockchain or be based on an existing blockchain network.
DApps are simply a way to update the blockchain. And here is the key: data written in the blockchain is permanent, it can’t be deleted or updated once it’s written! Meaning you can trust that data to be legit.
Finally, we’ll briefly touch upon exchange types. The most important one for new users is the CEX (centralized exchange) type of exchange. Any CEX acts as a mediator between buyers and sellers and are operated by companies that provide stability and security.
A CEX will let users to operate with traditional currencies (also called fiat) such as the US dollar or the Euro to buy crypto and vice versa with relative ease, and enable a more regulated space, often insured to provide users insurance and assurance for their transactions.
A DEX is a decentralized exchange, which is run through peer-to-peer interactions. These are more desirable to maintain the decentralized space DeFi is going for, but is more difficult to get into for newer users without knowing how to convert fiat into cryptocurrency to begin the process.
The main difference is that DEXes work entirely through contracts meaning you make all your crypto interactions with a program instead of a regulated company with all the middlemen involved.
Using wallets
For consistency in our examples, we’ll continue with Coinbase Wallet as our DeFi app. There are plenty of other examples that are as, if not more, popular such as Metamask.
The process and usability is relatively similar, as these apps have most of the same functionality. If there are differences in operation these differences can always be looked up easily on the apps’ websites and relevant communities.
Wallets in the crypto world have the same purpose as its physical namesake. They store your funds, and enable you to transact with places of interest that accept what you hold in them.
The key difference is that wallets are not tied to your personal identity, and you can have as many as you can create. Each wallet contains an address associated with the blockchain they are operating within.
Your funds are associated with your wallet using a private key, which is a unique encrypted piece of data that ties your assets to your wallet address. Private keys are essential in accessing your assets, and should never be shared with anybody.
There are a few different types of wallets you can choose, generalized to hot wallets and cold wallets. Hot wallets are connected to the internet, and cold wallets are totally offline. You will find hot wallets in the form of mobile or browser apps, like Coinbase Wallet and Trust Wallet. They allow you to have immediate access to Dexes and other dApps and can enable interactions with other wallets.
On the other hand, cold wallets are preferable when you want to protect your assets the most. Since they are offline, and usually in a physical device separated from your mobile or desktop device, they are kept safe as long as you have possession of them.
You cannot transact with a cold wallet until it is connected to a device with internet connectivity. Therefore, it is impractical to use cold wallets for everyday transactions.
YIELD FARMING: LIQUIDITY POOLS
Like many others entering the DeFi world over the past couple years, you’ve heard of the phrase “yield farming” but you may not know what exactly qualifies as such.
The simplest form of generating yield is to simply buy a cryptocurrency and hope its price goes up. This is what’s called speculation.
A more involved method would be to put your asset into a liquidity pool or stake it and earn interest from DeFi projects’ successes. This is generally paid out in the native token (the token with the name of the project, or something associated with the name like $COMP for Compound), and the rates depend on the maximum circulating supply and emissions schedule for total payout.
The idea behind a liquidity pool is that a market needs to have an available supply of what people want to buy. They offer rewards to people willing to add to the supply, also called a pool.
The availability of the supply is known as liquidity, and the pool that contains the liquidity is the liquidity pool. In cryptocurrency, in order to buy tokens that are based on the Ethereum network (ERC20 tokens), you typically buy using the ETH coin. This means that people will trade Eth for that ERC20 token, or trade back the ERC20 token for Eth.
In the free market, there are businesses that will pair you with somebody doing the opposite of your transaction to make sure it goes through smoothly, and as close to the set price you desire.
They are called market makers, and they provide the liquidity for your transaction. In cryptocurrency, this process is automated through decentralized exchanges like Uniswap, which are called automated market makers (AMM), and they are able to do this by having the liquidity pools we just talked about to make sure there is enough supply to go around.
TAKING IT FURTHER WITH LIQUIDITY MINING
You can take it a step further and reap profits from liquidity mining, contribute to a liquidity pool in places like Uniswap by offering a 50:50 ratio of Ethereum and an ERC20 token. As people purchase the ERC20 token with Eth, the balance shifts slightly to be higher on the Eth side. This ratio sets a disparity that increases the value of the ERC20 token relative to Eth, thereby increasing its price.
You earn rewards in the form of transaction fees, and asset rewards. The structure is dependent on which liquidity pool you are participating in, but the standard is to be paid in a liquidity pool token or the native token. Either token can then be further used as collateral to take out a loan within certain environments or be further staked into yield farming systems.
In some circumstances, it is possible to do the equivalent of a cyclical or cascading feeding system, where one pool rewards the user with a token that can be put into another pool, whereupon that second pool rewards in assets that can be further entered into another pool, and so on. This truly exemplifies the wonderful benefits of defi assets’ interest bearing nature. Those processes give you accumulative rewards that grow exponentially.
There are yield optimizing protocols that pool user funds to efficiently, effectively, and automatically search for the highest yield systems like yearn.finance. They search for the strategies performing the best and allocate deposited funds to increase profits for the DeFi protocol and all subsidiaries.
Yield farming with YELD Finance
Let’s now take a look how you can benefit from our particular token, YELD to earn more money while you sleep so your funds grow over time. YELD has a remarkably low maximum circulating supply, with burnoff mechanisms that drop the circulating supply over time.
In short, the less tokens there are over time, the higher the price will go since the price is directly based on the total supply. It is currently available on a few exchanges, mostly traded on Uniswap. It is an ERC20 token that you can only get on the Ethereum blockchain.
What makes YELD such an appealing acquisition? Currently, through YELD’s app there is a collection of NFTs you can trade for that will generate yield in a novel and exciting way. Most NFTs are purchased with the intention to be resold at a higher price, that’s how the collectors make their money. However, YELD’s NFTs also provide a passive earning mechanism that gives you YELD tokens just by holding your NFT cards.
There are 4 tiers of NFTs, at costs of 1, 10, 100, and 400 YELD each. Each tier, or rarity as it is referred to in the page, has several different NFT options for purchase. And among these options are a limited supply of each option. The idea is that when you purchase one of the NFTs, the YELD you commit to it gets split evenly into two places: a burn wallet and a YELD pool.
The burn wallet essentially locks that portion of the token forever, taking it out of circulation. This increases the value of the token, as its scarcity increases and therefore the value of the remaining circulating tokens increases.
The other half is distributed among holders of the NFTs. The split is determined by which NFTs you have, as each rarity has a different APY. The actual APY changes as more people claim their stake of NFTs, so it’s best to look at the app itself (nft.yeld.finance) but they are quite high at the time of writing (from 6.38% at the lowest to 2551.33% at the highest).
Furthermore, there will be future use cases for these NFTs (aside from looking at some pretty cool graphics in your own personal collection!).
You can trade your NFTs on marketplaces like Opensea, should you desire. However, if you hold on to your NFT you may be able to provide liquidity for YELD’s own CDL loans dApp to generate more yield from it (that’s one potential use case that may be added in the future).
The idea behind the CDL (Collateral Decreasing Loan) dApp is that you can deposit a collateral to borrow tokens at an interest rate for a period of time, and as you pay your loan back in full you increase your crypto score. As your score increases, you can take out larger loans of which a percentage can be uncollateralized. Meaning you borrow money in a fully decentralized manner. No need to ask any lending providers for permission, you’re your own bank.
On the other side of that are the liquidity providers, who can provide the assets for liquidity and earn yield from the interest collected on the borrowing side. This is where yield generation comes into place for YELD holders.
There is the ability to deposit stablecoins in the YELD app, wherein your deposited balance is automatically rebalanced via smart contracts employing different strategies to build the highest possible yield.
Simply put, you stake stablecoins and you make the highest possible return per year (APY) possible by allowing the smart contract to find the most profitable place to stake your money for you, automatically, while you collect your paycheck.
Currently, the biggest APY providers are Compound and Aave, two popular and powerful strategies utilized by the likes of yearn.finance and other large projects. Each stablecoin you deposit will earn you a smart token, specifically named after the coin of your choice. For example, staking DAI will yield you yeldDAI, which increases in value as your stake generates yield over time. You are able to withdraw your balance at any time.
Another system YELD has created to generate a profit is called the Retirement Treasury. The treasury is funded by taking a percentage of the collective APY generated by all the stablecoin stakers in our platform and converting those stablecoins into Eth. The Eth is stored into the Retirement Treasury, which is then distributed to token holders. The amount distributed is determined by the % each user has staked. The more YELD you’ve staked compared to others, the higher your reward percentage will be.
There are quite a few ways to generate great profits for yourself as the project grows, and plenty of ways the DAO itself can grow with the plethora of products available. When it comes to yield farming, YELD encompasses a very wide array of methods. Diversifying your strategies hedges against the market conditions of the cryptocurrency world effectively.
The overall endgame for YELD is to wind up at 10,000 circulating tokens. This will be the final count with no more tokens minted, and thereby increase the value of the tokens significantly.
With the combination of increasing value per token and allowing users to generate increasing amounts of YELD in their wallets, the tokenomics points to a bright financial future for all involved!
Final comments and thoughts
Although we strive to provide information to completeness, the cryptocurrency world is so large and ever-changing that it is impossible to cover all topics to the degree of satisfaction everybody desires in one article.
This article is meant to be a foray into DeFi, but many things were overly simplified for readability to beginner and intermediate users. We will be providing plenty of informative material in further articles, and coverages of varying depth and detail.
However, if you are interested in any particular topic being broken down please shoot us an email at hi@yeld.finance
Make sure to join our telegram group: https://t.me/yeldfinanceofficial
Follow our twitter https://twitter.com/yeldf
And start using our dapps here: https://yeld.finance
