How to Earn a Passive Income with Yield Farming in 2022?

Have you ever heard of yield farming? 

If not, you should absolutely look into it because it is now one of the hottest ways to earn a passive income using cryptocurrency 

But, in 2022, how much money can you expect to make from yield farming? 

In this post, we will answer the above question by evaluating the prospective profits at various suppliers and exposing you to the fundamentals of yield farming 

What Is Yield Farming? 

Yield farming is a popular but relatively a good method of earning cryptocurrencies that has emerged in tandem with the growth of the DeFi sector. Yield farming, also known as liquidity mining, is the process of lending, staking, and holding digital assets across several cryptocurrency or DeFi protocols utilizing complicated techniques. 

Farmers give liquidity to a project’s pool as part of the strategy by lending or staking cryptocurrencies to gain incentives. 

Aside from the rewards, several DeFi protocols provide tokens that reflect the users’ share of the liquidity pool, which they can transfer to other platforms to boost their potential gains. 

The number of coins engaged in yield farming can range from one token to several (typically 7–8) different cryptocurrencies, depending on the strategy’s intricacy. 

However, as a general rule, the more (non-stablecoin) digital assets and protocols a strategy employs for yield farming, the greater the risks faced by liquidity providers. 

To minimize risks and maximize possible rewards, yield farmers must have at least a rudimentary understanding of cryptocurrencies as well as the real approach they use to make profits. 

Having said that, yield farming has a significant profit potential. 

And it is for this reason that it has grown in popularity in the bitcoin business. 

How yield farming works? 

As previously said, yield farming is a new role in decentralized finance applications that adds to the necessary liquidity in DeFi networks. It gives crypto investors with trustless chances to earn passive income and profits by lending their assets using smart contracts. On general, when people talk about passive income, it rarely exceeds 5% or 10% in lending and staking platforms. However, in yield farming, this return is maximized, and investors are permitted to adopt tactics that generate more than a 50% annual return. As previously stated, this return is passive, and investors can obtain it independent of market conditions or price performance. 

Liquidity Pools 

To understand the yield farming process, we must first understand its underlying principles, like as liquidity pools, which are smart contracts that supply the essential liquidity for decentralized applications. To work properly, liquidity pools require liquidity provider users. These pools are utilized by many sites to provide the necessary liquidity in various cryptocurrencies. Liquidity providers can stake their assets in liquidity pools in order to gain rewards produced by the DeFi platform. 

These funds are used by decentralized apps like decentralized exchanges and quick exchanges to offer the liquidity needed to conduct exchange transactions. Some tactics involve reinvesting rewarded funds in additional liquidity pools in order to increase earnings. Some intricate yield farming tactics were developed in a relatively short period of time in order to maximize its returns. 

Because this sort of investment or farming is based on smart contracts, it gives excellent chances for crypto holders to generate passive income from their holdings. Because everything in this process is governed by smart contracts, which are trustless procedures, this sort of investment gives opportunities that may be termed risk-free. 

However, supplying liquidity for DeFi applications may yield a variety of benefits or rewards. The notion of total value locked (TVL) is developed to compute the maximum returns that various farming platforms give, and it may be used to evaluate the return of different DeFi platforms. 

How Total Value Locked (TVL) is calculated? 

Total value locked, or TVL, is a novel metric that indicates the entire health of yield farming platforms. It simply tracks the total value of cryptocurrencies locked in these smart contracts across numerous platforms in order to provide a comprehensive assessment of their performance. This notion works in the same way as the total cap of various cryptocurrencies, but its objective is to measure total money locked in DeFi applications. 

It is a useful metric for comparing the market share of various DeFi platforms and protocols that provide liquidity for these ecosystems. DeFi Pulse is a tool dedicated to tracking the TVL performance of these protocols. It should be highlighted that Ethereum is one of the most beneficial cryptocurrencies for investing in these activities, since many DeFi platforms are founded and built utilizing the Ethereum ecosystem. 

However, the most basic application of TVL is to track the capacity of a specific platform and coin. TVL might alternatively be tracked in terms of a specific cryptocurrency, such as ETH, USD, or BTC. Various computations provide an overall picture of the entire value locked up in these coins. 

How to calculate yield farming returns? 

Typically, yield farming profitability is assessed annually, which implies that total return in a year is determined to measure a platform’s profit rates. Two separate classic measurements are used to track the success of the DeFi platform: 

Annual Percentage Rate (APR) 

Annual Percentage Yield (APY) 

Both of these measurements track the returns on a certain asset in financial markets, but APY can also track compounding. Compounding is simply reinvesting the return on one investment in another, resulting in increased profits or returns. 

Because yield farming makes use of smart contracts, profits or returns on investments are reinvested in it more frequently than in other marketplaces. Several complex trading strategies, including several exchanges and reinvestments, are devised for this purpose in order to maximize an investor’s potential gains. 

However, it should be mentioned that this sort of investment is a technical procedure that employs good trading tactics. It is a competitive market in which traders aim to improve their annual profits by using their hidden tactics. As previously stated, while simple staking processes can produce up to a 10% yearly return, yield farmers can use intricate trading strategies to provide more than a 50% annual return. 

Risks of Yield Farming 

In comparison to other forms of income, yield farming maximizes the rewards of certain investors who own bigger quantities of cryptocurrency by lending their funds to DeFi projects. Unlike staking and many other sources of passive income, however, this type of trading is very technical and necessitates a thorough understanding of DeFi protocols. 

This form of investment also necessitates a thorough understanding of smart contracts, their values, and the programming methods that are directly used in them. This means that newcomers and users to the crypto market will be unable to employ this sort of investment since they lack the necessary technical understanding. 

Nominex Yield Farming to avoid risks 

To take advantage of this sort of farming, however, numerous services are launched that investors may employ to generate some large returns with their assets. In the sections that follow, you can compare the profit and return rates provided by various trading platforms and DeFi projects. Some of these ventures, such as Nominex, attempt to maximize investor earnings by employing specialized trading tactics on their funds. As you will see in the following section, these services can be utilised to generate more than a 50% yearly return. 

The sole need for investors to participate in such ventures is cryptocurrency ownership. With a substantial investment of more than $10,000 in bitcoin, it is feasible to earn up to more than 50% annually, which is an appealing rate for passive investing. So, if you want to start yield farming but don’t know where to begin, you can go to Nominex and sign up for its farming service. This is a fantastic possibility for newbies because they don’t have to deal with different sorts of programming smart contracts and appropriating different values for several automatic exchanges.