Yield Farming Research: How to Do Your Own Research

Introduction

Blockchain-based assets offer multiple ways to earn money and multiply your capital really quickly, but making quick profits may sometimes land you in hot water. Price action of your tokens in the direction opposite to your trades is as destructive, but their being stagnant is also detrimental to your investment as you may incur trading fees, gas fees and other charges as you hold and ultimately withdraw your funds. Luckily, there is a way out. You can earn handsome annual percentage yields (APYs) on your tokens while your hold crypto coins.

What is Yield Farming in Crypto Market?

Yield farming is a blockchain-related strategy to earn passive income by staking or lending their digital assets. When you feel confident about a project and holding its tokens for a long term seems a profitable prospect, it is a good idea to earn something while you hold them. Whether you are an investor or a crypto analyst, it is important to know what the mechanics of yield farming are, in how many ways you can earn crypto yields, what the risks are and what an investor should know about a project before investing in it.

Ways to Farm Crypto Yield

There are three main ways to earn passive income in the from of cryptocurrencies from blockchain projects.

Liquidity Provider

You can become a liquidity provider in a network. When a team launches a new project, it needs money to populate its liquidity pool. Here, it is worthwhile to remind you that on a decentralized exchange, there are no order books as there are on centralized exchanges. Buying and selling takes place through liquidity pools. When you contribute your assets to the pool, the project rewards you.

Lending Platforms

The second way to earn rewards is to become a part of a lending blockchain protocol. By lending crypto to others, you can earn sizeable interest. Crypto loans can be collateral loans, in which a borrower needs to provide the platform some money as a guarantee of return, or flash loans in which no collateral is required but the loan has to be returned within a trade.

Staking

Staking is the most popular method of yield farming. You support operations of a project by validating transactions or securing the network when you stake your funds. Since you lock up your tokens, the project rewards you by giving you additional tokens that accumulate over time and so do your gains.

You can use any one or more of the mentioned ways to farm yields, but before starting, it is important to know about the risks associated with yield farming.

Risks in Yield Farming

Impermanent Loss

Being a part of crypto market, yield farming is risky. The first risk is that when you lock your tokens on a network, they may appreciate or depreciate in value. If their price goes up, you cannot take profit. On the other hand, if they depreciate in value, your investment is gradually wasted even if the farming yield is added. This loss is called impermanent loss because it is realized only when you actually withdraw your tokens, incurring price-related loss as well as the penalties leveled by the network.

Hacks and Scams

Bugs in the smart contract of a network, whether put intentionally or occurring accidentally, may deprive investors of their capital. This risk is associated with newer projects much more than the older ones.

Gas Fees

High Gas fees can eat away your gains if you do not take into account the busy schedules of the network when it is congested.

What to Investigate before Investing?

1. Team

The players behind a project must be serious enough to design the website or get it designed properly. A sloppy looking website puts a question mark on the intent of the team members. Moreover, the team must be well-balanced. It must contain software engineers, entrepreneurs, product managers, developers, marketing professionals, and financial experts.

It is also advisable to do research on the members individually. This will help you know about the individuals’ credentials, experience and expertise. You can also scroll social media platforms to get to know about their influence and skillsets.

2. Audited Networks

Quality projects get their smart contracts audited by independent and reliable firms and subsequently publish their audit reports. These reports confirm that the projects have no bugs in the smart contracts. It is modus operandi of scammers that they fork a project from a pre-existing successful chain, but they obviously fail to maintain it for a long term. Some are even designed by bad actors to fail.

Understanding the Total Value Locked (TVL) in a project is also essential, as it reflects the cumulative amount currently secured within the protocol. A notably low TVL may indicate limited capital invested in the protocol, potentially resulting in reduced yield opportunities for participants.

The Quality and Reliability of Reward Tokens

Different networks offer different tokens as rewards. It is necessary to investigate what you will get in the end. If you get a stable coin like $USDT, $USDC, etc, or a blue-chip token like $BTC, $ETH, $SOL, etc., you are good to go. However, many projects offer their own tokens as a reward, and show incredibly high APYs. Since new tokens are extremely volatile, they are not reliable at all.

High Rewards and Risks of Early Adoption

Newly designed DeFi projects want to attract maximum number of users and stakers. For this purpose, they offer very high yields. High yields are difficult to maintain even for recognized projects, so you must be wary of high APYs. On the other hand, many established projects rewarded the early participants generously, leaving many sideliners to regret today. Not to regret it again, many dive in when a new project comes to fore, but not every such project is Ethereum or Solana of the future.

The sum and substance of the discussion is that if you consider the given information and follow it verbatim, you are likely never to be deceived, plundered or scammed.

Conclusion

Yield farming can be an effective way to earn passive income in the crypto market, but it is not without risks. From impermanent loss and smart contract vulnerabilities to high gas fees and volatile reward tokens, every yield opportunity requires careful evaluation. By researching the team, audits, tokenomics, and sustainability of rewards, investors can make more informed decisions. Ultimately, disciplined research and risk awareness are essential to benefiting from yield farming while protecting long-term capital.