Cryptocurrency: How To Earn Yields on Defi

 

The world has gone through so many civilizations. In fact, we can ipso facto  say that the changes we see in the world, are results of the rise and fall of various civilizations. This civilizations has manifested in various aspects of human endeavors, especially in economical capital. Once upon a time, the barter trade utilized cowries. Years later, physical currencies are now being utilized, which is an improvement on cowries of course. It is only natural that there would also be an improvement on money, as we know it. This is where the concept of Digital Currencies come in. They come in various kinds ranging from Bitcoin, Pi, Ethereum etc. This article is focused on how yields are earned in DeFi, an acronym for Decentralized Finance, which is a model or platform through which cryptocurrencies are managed using cryptography, as against the centralized authority.

The Concept of Decentralized Finance

Decentralised Finance is one of the models through which cryptocurrencies are managed in the Finance Technology space. Its decentralised nature enables it to ensure the eradication of intermediaries in the financial transactions of investors. One of the investment strategy of Decentralized Finance is Yield Farming. It entails lending out cryptocurrency coins, so as to get rewards in the form of interest. This can also be obtained in the bank industries, where money is deposited by a customer, and this in turn yields interest for the customer. In Decentralized Finance, Yield Farming involves the movement of cryptocurrency through different market places, and it is also identified where the strategy becomes less effective when more people know about it. It is however, the most significant aspect in the DeFi sector, as it has helped Decentralized Finance expand from a market cap of $500 million to $10 billion in 2020 alone.

How Yields are earned on DeFi

In Decentralized Finance, there are some key concepts we must farmiliarize ourselves with. For instance, users who provide their cryptocurrencies for the functioning of the Decentralized Finance platform are known as Liquidity Providers (LPs). These LPs provide coins to a Liquidity Pool, which is a smart contract-based decentralised application (dApp) that contains all the funds. Once these Liquidity Providers (LPs) lock coins into a liquidity fund they are awarded an interest generated from the underlying DeFi platform the liquidity pool is on. In other words, it is an income opportunity by lending your coins through a decentralised application (dApp), and this lending happens through smart contracts with no intermediator. The Liquidity Pool runs a marketplace where Liquidity Providers can lend or borrow tokens; and the usage of these marketplace incurs fees from the users, and these fees are in turn, used to pay Liquidity Providers for staking their own tokens in the pool. This has benefitted Liquidity Providers, whom regardless of the risks involved are willing to lend out their tokens, whilst taking a leap of faith that interest would be gotten. Decentralised Finance and its method of earning yield, can be said therefore, to be a method of risky favourable interest acquisition.


We live in a world that is in a constant revolution. This revolution has been affecting every area of our lives, including the financial sector. However, we can say that things keep getting better, as the Finance Technology which has emerged in the form of Decentralized Finance, has not only succeeded in diverting the interest of individuals to cryptocurrency, it has also encouraged financial intelligence amongst them. This is because it has provided a safe and easy means of transactions. Individuals need not experience the protocols of the normal banking system before they make any transaction. Conclusively, we can categorically say that the future of the financial space is digital, and that future is upon us.