A Short Guide for Yield Farming in Crypto

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A Short Guide for
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Overview of Yield Farming
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To Understand Yield Farming in Crypto Lets
understand each term.Yield is the return on
your investment, and Farming represents the
possible exponential growth that you can receive
by finding the right place to invest.
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How Does Yield Farming Work?
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To understand how yield farming works, lets
make sense of these two important
terms Liquidity pools (LPs) Liquidity
providers Liquidity is a term that refers to how
easily you can convert your crypto to cash (or
other crypto) without hurting the market price.
Liquidity pools are smart contracts that contain
two cryptocurrencies to help facilitate
transactions quickly and effortlessly. They are
pre-funded. Therefore, for the buyer to buy,
there need not have to be a seller at that
particular moment, only sufficient liquidity in
the pool.
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How do liquidity pools work?
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Liquidity pools use the constant product formula
(xy k ) to determine the market price of a
token in that pool. While x and y represent the
token balance of a pair, k is a constant
that doesnt change in value. This formula is
also the foundation of how Automated Market
Makers (AMM) work.
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How to provide liquidity to a pool?
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Anyone can become a liquidity provider (LP) in
DeFi by adding trading pair tokens into the
pool. However, youd need to add both tokens in
a 5050 ratio. For example, if you want to add
1000 worth of liquidity to the ETH-USDT pool,
youd need 500 worth of both ETH and
USDT. Liquidity providers must follow
this standard to ensure that the pool always
maintains a 50-50 mix of token x and token y.
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Risks in Yield Farming
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• While Yield Farming is one of the ways to earn
  high rewards, it is a high-risk adventure that
  has several pitfalls like
• Impermanent Loss When LPs provide liquidity to
  liquidity pools, if the assets value go up or
  down in value, the
• impermanent loss takes place.
• Smart Contract Risks Since anyone can develop a
  smart contract in DeFi, it increases the risks
  of bugs in a protocol.
• Composability One of the biggest advantages of
  DeFi, composability, If the base chain of a
  token is attacked, it can affect all the
  protocols that use those tokens.

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Final Thoughts on Yield farming
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Yield farming is a great way to make passive
income on your crypto holdings. Many users have
been able to generate 10-15 yield. However, you
need to take into account all the risks, as well
as, consider evaluating protocols before you
start farming.
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