All about yield farming

Is yield farming the same as staking?

We’re all about bringing the benefits of DeFi to the mainstream here at Wirex, which is why we’re breaking down all the different types of DeFi earning for you. If you haven’t already, check out our previous blogs about DeFi as a whole, staking and crypto loans, before moving onto today’s topic: yield farming.

Yield farming might sound similar to staking at first glance, since both involve locking away your crypto in order to earn more crypto. So how exactly do they differ?

While staking refers to the transaction validation process on a Proof-of-Stake (PoS) blockchain, yield farming involves so-called liquidity providers (‘LPs’) adding funds to liquidity pools.

Sometimes known as liquidity mining, the process is significantly more complex - and profitable - than staking. Yield farming comes with higher risks, but higher rewards.

How does it work?

How do you go about earning passive income through yield farming? First off, you deposit your funds into a liquidity pool, which is basically a smart contract that locks your tokens away. This pool powers a marketplace on which users can lend, borrow or exchange tokens. Anyone who uses it has to pay a fee, which then goes to you - the liquidity provider. You’re essentially lending your crypto in order to get a return.

Here’s where things get a little more complicated: you can also create a chain of investments by reinvesting your reward tokens into other liquidity pools for yet more rewards.

Yield farming platforms are generally built on the Ethereum network, which powers nearly all DeFi applications and protocols.

Where can you do it?

There are a number of yield farming platforms and protocols out there. Some you may have heard of are Aave, which lets you easily lend and borrow a range of crypto, and yearn.finance, which moves your funds between different liquidity pools to find the best interest rates.

Both platforms’ native tokens - AAVE and YFI - are now available to buy and exchange in the Wirex app.

What are the pros and cons?

The main benefit of yield farming is, unsurprisingly, profit. It can generate some serious interest compared to traditional investments or even DeFi staking, which can then be reinvested in other DeFi projects for even more yield.

However, in order to make any significant profit you need to invest a significant amount of money, which makes yield farming somewhat inaccessible to your average crypto fan. Volatile interest rates also mean you never really know what your returns will look like.

Unless you’re particularly crypto savvy, the process of yield farming may not be all that straightforward. Experienced yield farmers tend to employ extremely complex strategies to maximise their gains - and they don’t like giving away their secrets.

X-Accounts: saving made simple

To be a successful yield farmer, then, it would appear you have to know exactly what you’re doing and have plenty of spare cash. But what about the rest of us?

Thankfully, we’ve got X-Accounts. Wirex’s innovative new savings tool lets you earn as much as 16% AER on select currencies, without any fees, fixed terms, minimum amounts or complicated processes.

We do all the hard work behind the scenes - all you have to do is add funds to up to 10 X-Accounts and name them after whatever it is you’re saving for.

Withdraw your funds for free any time you like or, keep them in and watch them grow. Open yours in the Wirex app today.