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DeFi Farm 101: an introduction to yield farming

Table of Contents

As a new investor, decentralized finance (DeFi) can seem intimidating and complex. The purpose of this DeFi Farm 101 guide is to introduce you to staking and yield-farming in DeFi.

What is Staking? #

“Staking is the process of actively participating in transaction validation (similar to mining) on a proof-of-stake (PoS) blockchain.” – Coinbase

In simple terms, when you stake your tokens into a pool, you’ll get a percentage share of the earned profit if your staked tokens are selected (these selections are random) every time a new transaction is validated. That’s why the bigger your share of the pool, the higher your share of profit will be.

What is Yield Farming? #

Yield Farming, sometimes called Liquidity Mining, is a terminology that you’ll often find in the DeFi space. Yield Farming is similar, in its core utility, to staking with more complexities behind the scenes. But the core idea remains the same: you lock your cryptocurrencies and earn mined rewards for the validated transactions.

In Yield Farming you’ll usually find two options to earn rewards:

  • Farms (Providing liquidity pools).
  • Pools (Staking tokens).

Farms and Pools #

In the picture below you’ll see Liquidity Pools from the DeFi platform pancakeswap.finance. When we select the Farms menu on the left (some DApps might use different terminology for their project, but the idea will remain the same, providing liquidity pools or staking a single token on their pools), a new page is loaded with all active Farms.

Let’s say, for example, we choose CAKE-BNB. When we provide liquidity to this trading pair, we’ll earn a percentage of the trading fees that a trader has to pay every time he swaps his CAKE to BNB (or vice versa) in that pool.

When we select the Pools menu on the left, a new page loads, which includes single token pools that you can participate in to earn rewards. Pancakeswap names these pools “Syrup Pools’.

You’ll now see the option to stake CAKE (PancakeSwap’s native token) to earn different types of tokens, usually for a limited period of time. There are two types of staking on Pancakeswap:

  • Staking CAKE earns CAKE (native earns native), unlimited time
  • Staking CAKE earns another token (native earns non-native), only for a certain amount of time, or blocks, and with a fixed amount of non-native tokens as rewards.

By staking your tokens, you are providing liquidity for the project, and you’ll earn rewards whenever a transaction is successfully validated.

How do we gain profit from staking? #

Staking in DeFi means you can participate, by utilizing smart contracts, on various issues via voting in a proof-of-stake model as well as earning passive rewards by locking up their crypto.

When you start staking, you send your assets to a smart contract which locks them up. Once your stake is locked up, you are able to vote to approve (or validate) transactions.

In general, staking rules are distinct for most networks and DApps:

  1. The staker accepts that he’ll only validate valid transactions on the network. For example, he will not vote to approve double-spend transactions.
  2. In trade for validating transactions, the network rewards the staker with a staking reward, which could be a token or coin.
  3. If a staker approves illegal transactions, he may lose some or all of their staked assets (also known as slashing).

How to start Staking and Farming in DeFi #

To help you get started with staking and yield-farming, we wrote the “Start Yield-Farming Within 20 Minutes” guide (link once published) for you. This guide helps you to set up everything needed in order to start Farming or Staking.

A quick note on Liquidity Pools #

Unlike staking, liquidity pools have several risks. Before you start yield-farming with liquidity pools, please read our guide about liquidity pools so you understand what they are, how they work and what the risks are of providing liquidity.

Conclusion #

By now you should have a better understanding of what the basics of staking and yield-farming are. Make sure to read our other articles and guides on wiki.rugdoc.io as well!

Updated on June 27, 2021

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