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- 1 Decentralized Finance has made advancements in financial institutions; for now, individuals can access their assets or make transactions without the need for banks or courts to validate these transactions.
- 2 With the advent of DeFi investors and cryptocurrencies, users have advanced ways of earning rewards through liquidity farming and yield farming.
There are various ways in which DeFi users and investors can earn cryptocurrencies. What is Decentralized Finance (DeFi)? We will be providing vast knowledge on what DeFi is and how investors can earn cryptocurrencies through liquidity farming, yield farming, and composability.
Introduction to DeFi
DeFi is the abbreviation for “Decentralized Finance.” By “decentralized,” we mean that finance is not controlled or owned by anyone. Therefore, DeFi is a combination of numerous financial products that run on a blockchain system that is not centralized by Financial institutions like banks. The sales execution is possible because of smart contracts. DeFi is structured in such a way that it does not need intermediaries; it allows users to conduct their own sales through developed technology. The main reason for DeFi to eliminate intermediaries like banks is to avoid fees that are charged for using bank services. DeFi allows its users to own and control their funds in their DeFi wallet, which creates privacy.
Several benefits come from DeFi. For instance, its main importance is to give users full control of their assets, which encourages simple access to financial services without the need for intermediaries or brokerage for a transaction to be conducted. Individuals can access these services wherever they are since it’s a 24\7 hrs system that is not authorized by anyone. For instance, traditional institutions were dependent on banks and courts for a transaction to be validated and occur. But, with DeFi technology, we don’t need their service for transactions to happen. We can therefore conclude that DeFi made things cheaper and simpler.
Therefore, in this article, we are going to be discussing how individuals earn their digital assets through liquidity farming, yield farming, and composability in DeFi. will be discussing all these terms and giving you a clear view of what happens in yield farming and liquidity farming.
Liquidity Farming
In cryptocurrency, there are numerous ways in which individuals can make money. Crypto has become widely known, and numbers don’t lie at all. Initially, investing in cryptocurrencies was to purchase digital assets and hold them; after a while, individuals would sell their assets after an increase in value.
Liquidity is one of the ways investors in cryptocurrency earn their assets. Liquidity farming participants put their crypto tokens in different pools. These tokens in these pools will, after some time, increase in value, and these participants will later sell their crypto and earn more tokens. LPs (liquid providers) are required to add more cryptocurrency to their pool. The transaction of this asset in the pool later enables PL to earn interest. For instance, if an LP has to add more liquidity to a BTC\USD pool. He/she is required to add equal liquidity to the USD pool and the BTC pool. These transaction fees are awarded to the PL.
Liquidity pools use smart contracts to detect prices in different pools. Normally, traders in these pools sell and buy their assets in different pools since the price fluctuates. For instance, the USD price is decreasing in the BTC\USD pool. Traders will buy USD and store the asset until its value increases, then later sell it and earn a profit.
Yield Farming
Initially, we discussed that the importance of DeFi is that it does not require middlemen. Yield farming raised alarms in 2020 after it was invested in cryptocurrency. It allowed users to deposit and store their cryptocurrency and later earn interest. The advantage of the decentralized system is that it does not require banks or institutions to lend or borrow digital currency, which led to its popularity.
Yield farming is another way that cryptocurrency investors earn their tokens. Individuals deposit their crypto assets and later earn rewards. DeFi enables users to earn crypto when they deposit their assets; smart contracts later hold their assets and later pay them in interest. Normally, these locked assets are used by another person. The smart contract lent these assets to another person, who later paid them with interest.
Yield farming also gives rewards to its users when buying and selling are executed in the market. At this point, they earn a reward called passive income. The automated market maker releases the stored assets that were encrypted by individuals for buying and selling in the market to be completed. When these transactions are made, investors who have stored their assets earn passive income.
Yield farming is easy, as long as you have a strong connection and a comprehensive understanding of what DeFi is and how to use it. You can make money comfortably using a DeFi wallet by storing your assets.
Composability in DeFi
Composability is the ability to combine two different DeFi. The advantage that comes with composability is that you do not require fees or any authorization to combine the two DeFis. For instance, individuals can now access loans, exchange their asset values, enter liquidity pools, earn yield, and much more using decentralized finance. Developers have the authority to develop their applications using these programming languages; they do not require permission from anyone.
One of the ways you can understand composability is how individuals can combine blocks in one structure and build an interesting structure. This enables a single piece of software to connect to various software systems.
Conclusions
Cryptocurrency has taken over the world; developments have been made, and there are numerous ways in which individuals can earn through cryptocurrency. For instance, composability enables one to combine many applications for individuals, which can help individuals earn profits in cryptocurrency. Yield farming has enabled investors to earn by stocking cryptocurrencies and later earning rewards in interest rates and applications. With blockchain being decentralized, people have easy access to their assets, eliminating all intermediaries and brokerages.
With the advent of DeFi, it has revolutionized cryptocurrency, enabling everyone to embrace these digital currencies.
With a background in journalism, Ritika Sharma has worked with many reputed media firms focusing on general news such as politics and crime. She joined The Coin Republic as a reporter for crypto, and found a great passion for cryptocurrency, Web3, NFTs and other digital assets. She spends a lot of time researching and delving deeper into these concepts around the clock, and is a strong advocate for women in STEM.
