The exact mechanics of yield farming rely upon the phrases and options of the person DeFi software. The observe began out by providing customers a small share of transaction charges for contributing liquidity to a selected software, comparable to Uniswap or Balancer. Nonetheless, the commonest yield farming methodology is to make use of a DeFi software and earn the mission token in return.
This observe turned widespread early in the summertime of 2020 when Compound introduced it might start issuing its COMP governance token to lenders and borrowers who use the Compound software. It was an prompt hit, pushing Compound to the top of the DeFi rankings.
Since then, a number of initiatives have adopted go well with by creating DeFi purposes with related governance or native tokens and rewarding customers with their tokens. These copycat tokens have replicated COMP’s success like, for instance, Balancer’s BAL token, which gained 230% instantly after launching. The continued success of every new mission fuels extra innovation, as initiatives compete fiercely for customers.
Essentially the most profitable yield farmers maximize their returns by deploying extra sophisticated funding methods. These methods often contain staking tokens in a sequence of protocols to generate most yield.
Yield farmers sometimes stake stablecoins, comparable to Dai, Tether (USDT) or USD Coin (USDC), as they provide a straightforward approach to observe income and losses. Nonetheless, it’s additionally potential to farm yield utilizing cryptocurrencies comparable to Ether (ETH).