Investing in cryptocurrency comes in various forms, from holding Bitcoin long-term in hopes of consistent growth to hedging for momentous spikes with altcoins. Each method of investing will have its risks and merits, and Thunder Academy will be touching on an investment method called yield farming. 

Yield farming offers an investment path for users to earn rewards through depositing their crypto tokens. This method utilizes the assets held so it’s not gathering dust. With this in mind, let’s take a look at what yield farming is, what you should expect from it in terms of pros and cons, and how to go about yield farming! This is the 5 minute yield farming guide!

What is Yield Farming?

Yield farming is an investment strategy comparable to earning interest from your savings account. Some even compare it to credit card churning, which is valid depending on how you go about yield farming. 

Yield farming centers around depositing crypto assets into a liquidity pool on a decentralized finance platform or application to earn rewards. By depositing into the liquidity pool, you become a liquidity provider (LP) and earn an annual percentage yield (APY) similar to interest from a savings account. Your investment will bring potential financial gains to you while promoting the use of the platforms to increase sustainability for development and establishment. 

While the comparison with earning interest is very close, yield farming is much more volatile. Unlike traditional finance, there’s not much in terms of protection. Yield farming is susceptible to risks from developers, smart contracts, and general market volatility. This is a trade-off as most yield farming rewards will be greater than rewards from traditional finance, so risk management in picking a suitable platform/crypto for yield farming becomes vital.

Knowing how to manage and navigate these risks is vital for yield farming, but the investment potential in exchange can be incredible. Follow this yield farming guide as we dive into the next part.

What do I gain from Yield Farming?

The quick answer is investment returns in the form of more crypto. Here are some of the pros and cons:

Pros

Potential high returns– The core point of investing in yield farming is the prospects of returns. Yield farming can offer extremely high returns balanced by the potential risks involved. Your holdings of the crypto will net you extra rewards akin to interest.

Decentralization focused– Yield farming allows users to bypass traditional financial methods which are often much more centralized and regulated. This adheres to the inherently decentralized nature of blockchain technology.

Influence through governance– Farmers often hold governance tokens of the platform involved. This helps holders gain governance to influence decisions and changes. 

High accessibility– As long as you have access to the internet and DeFi systems, you can participate in yield farming. Having easier access differs from traditional financial investments in that the barrier to entry is much lower, allowing more people to join in.

Increase liquidity– Yield farming contributes to the liquidity of DeFi platforms. Increased liquidity will reduce overall investment risk, stabilize token prices, and lower volatility. Not only are you investing for returns, you are stabilizing the platform.

Cons

High volatility– The signature characteristic of cryptocurrency in the current market is high volatility. Prices can rise and fall at the drop of a dime, and this can highly affect your investments. Yield farming isn’t safe from market volatility, so there’s a potential to take heavy losses. 

Security concerns– Smart contract vulnerabilities and the potential for scams/frauds can cause security issues when yield farming. Attackers can exploit smart contracts utilized in yield farming, opening security holes. Rug pulls can happen in the crypto landscape, and yield farming can sometimes fall victim to these rug pulls.

Impermanent loss– Impermanent loss happens when withdrawing an asset where there’s a difference in asset value after you initially deposited it in the liquidity pool. Here’s an article on impermanent loss, but the general gist is losing value due to providing for the liquidity pool as opposed to simply holding.

Sustainability and saturation– The crypto landscape is constantly changing. This makes sustainability an issue for yield farming as it’s more of a risk to hold out for the long term compared to traditional financial methods. Also, yield farming as a whole is becoming a saturated concept. Finding projects with better returns will only get more challenging as the market fills up.

How do I Start?

Next on the yield farming guide is how to go about it all. Using one of our most trusted partners, SushiSwap, as an example, let’s go over how one can dive into yield farming.

Step 1– Choose a farming protocol like SushiSwap which is an automated market-making (AMM) exchange. 

Step 2– Go to the liquidity section and provide liquidity via depositing the chosen assets. This will give you a Sushi Liquidity Pool (SLP) token. 

Step 3– Take your SLP token and deposit it in the yield farm to earn rewards.

It’s that easy. Yield farming is a simple process of depositing in the liquidity pool to get a liquidity token, and then putting that token in the farm to gain farming rewards.

What do I need to Watch Out For?

The most important thing to note is to understand the platform that you are farming on. This will require you to understand the basics of smart contracts and the DeFi protocols being utilized. By understanding the platform’s foundation and inner workings, it’s easier to manage security concerns.

Next, you will want to look at the asset volatility. An older, more sustained platform will generally be much safer despite the gains being potentially lower. The same can be said for the opposite, so it’s vital to manage your expectations and balance your investment risks.

Generally, you will want to tackle yield farming as you would with any other investment method, which is with caution and care.

ThunderCore and What’s Next?

​​ThunderCore is an EVM-compatible blockchain featuring a breakthrough consensus protocol, PaLa, allowing lightning-fast efficiency. With users in more than 100 countries, this blockchain emphasizes a growing global reach. ThunderCore offers a native currency, TT, and nurtures an innovative ecosystem within the TT Wallet mobile app..

With ThunderCore priming for more news and updates, it’s important to understand all there is to know regarding the crypto/web3 landscape. The yield farming guide is all about informing! After this introduction into the world of yield farming, we will move on to discuss how yield farming differs from staking and some of the top platforms for yield farming next time! Watch out for more Thunder Academy!