TL;DR
- What is DeFi (Decentralized Finance)
- What is Yield Farming
- What is a Liquidity Pool
- What does the farming process look like
Decentralized Finance (DeFi) and APY
Yield farming is a basic underlying practice of the financial system that crypto has brought about. It is also a part of “DeFi” (Decentralized Finance). DeFi is markedly different from the traditional financial system, commonly referred to as CeFi, or centralized finance.
Rather than an endless series of various tax forms and ID requirements, DeFi allows for “trustless” transactions that don’t require traditional centralized market makers. In this system, lending is secured by defined collateral and the balance in the exchange (swap) of one asset for another backed by liquidity pools that are locked on smart contracts. This is all a technical way of saying that individuals have the power to use their money more effectively than in a traditional bank.
The core benefit in being able to access and deploy capital in such a rapid and multifocal manner is that you can earn a much higher APY. But beware: you can also earn much lower APY if you are not managing your risk. The DeFi universe is very technical and quickly changing. You should always do your own research (DYOR) when choosing a place to put your money.
Yield farming can be defined a number of ways. But it is generally the attempt at earning a higher APY by deploying capital in multiple places at once. In traditional CeFi, banks offer returns of around 5% – AT BEST – oftentimes not even accounting for inflation. In contrast, Meta Pool offers ~11% APY just through staking – without leveraging your capital any further. At the same time, Meta Pool allows users to use that same sum of capital in different farms and exchanges across the NEAR DeFi ecosystem. This allows users to earn an additional APY and make even higher return.
What is Yield Farming?
Yield farming is the basic practice of using the DeFi tools outlined above to generate a higher APY. It is also one way to increase liquidity for a project as well as a way to increase assets available to users of the project. In turn, the project allows for more rewards when providing liquidity.
Liquidity Pools are created to ensure that a certain and popular pair of assets has enough funds to exchange one asset for another. This lending is secured by defined collateral.
Yield farming is essentially using these various forms of liquidity provision and subsequent rewards to increase the APY of their capital.
How does Yield Farming Work?
There are 2 primary means of earning APY through providing liquidity:
- liquidity pools for farming in DEX’s with AMM’s
- liquidity pools which are for providing liquidity to lending and borrowing protocols.
Farming with a liquidity pool
- The project creates the necessary Liquidity Pool for which the user will receive a certain fee of all swaps in this Pool. It also allocates additional rewards for a certain period of time for the Farm Pool.
- The user adds his assets to the Liquidity Pool created by the project. When adding liquidity to this Pool, the user receives a share of the Pool in the form of LP-tokens.
- The user places his share in the form of LP-tokens in the farm pool of stimulated liquidity and receives additional rewards.
Providing liquidity to lending and borrowing protocols
- The project creates the necessary Liquidity Pool for which the user will receive some assets (project token or/and other incentives).
- The user adds his assets to the Liquidity Pools created by the project and receives additional rewards. There is no need to form an LP here, as is done on DEX AMM or in farming projects, there is 1 Pool – 1 asset or 1 Pool – 1 token.
- The user can borrow other tokens provided by other users in the liquidity pools of the lending and borrowing protocol. But borrowing is possible only if users deposit their own assets to secure the collateral (point 1). When borrowing, the user will also receive rewards in the form of various assets or a project token.
These processes can encompass both volatile assets and algorithmic stable coins. They can become even more complex as different strategies expand on these basic strategies. However, in order to take advantage of this Yield Farming model, which includes borrowing with collateral, you need to study the documents of the project that provides this opportunity and monitor the level of margin allowed.
Advantages & Opportunities from Yield Farming
Yield Farming opens up great additional opportunities for everyone in DeFi. It’s a great way to increase your income, while also having the opportunity to freely, quickly and losslessly swap tokens. Often referred to as a strategy for earning passive income, Yield farming can generate APY with little to no physical work.
Nevertheless, we want to warn users that some Pools may rebalance over time. In certain situations, the pool may become imbalanced. So while the share of LP-tokens will remain constant, the number of tokens inside the share will change, and this is called impermanent loss. Pursuing passive income through DeFi is inherently a risky strategy. This is why it is important to be careful about your assets and follow your investment strategy and risk management while farming.
Liquid staking – the primary function of Meta Pool – is a much less risky aspect of DeFi. You can earn a secure APY and create passive income just by staking with Meta Pool (without risking impermanent loss). And you can use your stNEAR in a similarly secure investment.
Overall, liquid staking is itself less risky than a full-fledged yield farming strategy, but limits the returns you can earn relative to farming. However, liquid staking still gives returns that are much higher than anything offered in traditional CeFi.
Meta Pool cooperates with leaders in Yield Farming such as Ref Finance on NEAR and Trisolaris and WannaSwap on Aurora (full list of partners here)
Please see our GitBook for instructions if you need help to deposit your assets on our Yield Farming partner platforms.
Leveraged Yield Farming
Leveraged yield farming is yet another way of further complicating the chain of lending and borrowing in order to increase net APY. It is a mechanism that allows farmers to lever up their yield farming position.
This means farmers can borrow external liquidity to add to the farm. As a result of having more liquidity, leveraged yield farmers can gain more rewards and a larger share of the trading fees than otherwise.
The first project to launch on Meta Yield, PembRock Finance, allows you to utilize leverage to increase the efficacy of your farming position.
To learn more about PembRock, and what leveraged yield farming looks like, click here.
Is Yield farming Risky?
Yield farming carries a number of risks that you should understand before starting. Scams, hacks and losses due to volatility are not uncommon in the DeFi yield farming space. The first step for anyone wishing to use DeFi is to research the most trusted and tested platforms.
Get educated. Do Your Own Research!
This is not an endorsement of any project, and should not be interpreted as investment advice. This Guide is for educational purposes only.
About Meta Pool & stNEAR
Meta Pool is the leading liquid staking solution for $NEAR and wNEAR token holders. With Meta Pool you earn NEAR staking rewards and maintain your liquidity to participate in DeFi protocols on NEAR and Aurora.
Users staking $NEAR and wNEAR with Meta Pool receive in exchange stNEAR (staked NEAR) tokens.
stNEAR simultaneously accrues staking rewards and unlocks users’ liquidity enabling them to participate in DeFi activities (e.g. lending, farming, borrowing) on NEAR and Aurora.
Stake $NEAR on Meta Pool
~11% APY
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Yield-bearing token
Go DeFi on NEAR & Aurora
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Meta Pool also solves the problems associated with Proof-of-Stake networks staking: illiquidity, immovability and accessibility. Meta Pool also aims to distribute staking in multiple validators to improve censorship-resistance of the NEAR network.
With a TVL of ~9 Million $NEAR and growing, Meta Pool has become in just a few months a cornerstone element of the NEAR ecosystem. Meta Pool is making NEAR Protocol more decentralized and therefore more secure.
In February 2022 Meta Pool has been successfully audited by BlockSec, confirming the implementation of the highest security standards.
For more information visit https://metapool.app.
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