Defi
Decentralized finance (commonly referred to as DeFi ) is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains.
What is Yield Farming?
Yield farming is the popular strategy DeFi users take advantage of to put their cryptocurrencies to work to earn high interest. According to DeFiPulse, a DeFi analytics and ranking platform, DeFi protocols have over $50 billion worth of cryptocurrency locked in these programs. There are multiple types of yield farming projects offering different financial services, mostly to earn astonishingly high interest. Large banks might earn you 1.0% to 2.5% a year, but these low percent yields
can’t compete with the 20% to 200% earnings some DeFi platforms tout.
Yield Farming vs Staking
Liquidity Pool and Liquidity Provider
Liquidity Pool
A liquidity pool is usually composed of 2 or more cryptocurrency tokens that create a market for anyone wishing to exchange between the 2. Some exchanges also offer multiple crypto asset pools.
The most popular decentralized exchange is Uniswap, with over $7 billion in total value locked in the protocol at the time of writing. Uniswap leverages liquidity pools with an automated market maker (AMM) to offer instant cryptocurrency exchanges. Other popular exchanges that utilize liquidity pools
include AAVE, Curve, SushiSwap and Balancer.
Liquidity Provider
A Liquidity Provider (LP) is a user that supplies a liquidity pool with cryptocurrency assets so that the funds can then be used for the associated DeFi protocol. Anyone can become a liquidity provider in DeFi and with the innovation of AMMs, the combination has truly open up the financial capabilities of an individual. Liquidity providers need to deposit cryptocurrencies of equal proportion into a liquidity pool.
This provides a market for that cryptocurrency pairing that others can then use to trade. In return for providing liquidity to a market, the LP is offered a return on investment. Without LPs, trades could not occur, so, as LPs are facilitating trades, they are rewarded with a percentage of the transaction fees. The amount that a LP is rewarded depends on the percentage of the liquidity pool that they provide.
