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<p>DeFi Yield Farming Explained</p><p>Fueling the speeding growth of decentralized finance is the high-speed nature of development and innovation. It has led to many new financial primitives that previously couldn’t exist due to the inefficiencies and counterparty risk present in today’s traditional financial system. The most recent innovation taking the DeFi space by storm is Yield Farming, also referred to as Liquidity Mining.</p><h2 id="header-0">What is Yield Farming?</h2><p>Yield farming (or liquidity mining) is a new primitive enabled by DeFi that can be effective in incentivizing liquidity for a project, launching a fair distribution of a new token, and growing an active and long-lasting community. Yield farming incentives reward users who provide liquidity or otherwise contribute to the health of a decentralized protocol.</p><h2 id="header-1">Main Goals of Yield Farming</h2><p>Yield Farming is often implemented with two primary goals in mind:</p><ul><li>Incentivize users to deposit and lock up their liquidity into a DeFi application, growing the Total Value Locked (TVL) and bootstrapping the supply side of the ecosystem. More liquidity decreases slippage for users and fosters growth in the demand side of the ecosystem by creating a superior offering relative to competitors.</li><li>Fairly distribute a DeFi application’s governance token to protocol users who take on the opportunity cost of not depositing their funds elsewhere (e.g. impermanent loss). The fair distribution of tokens allows for decentralized governance from day one since none of the supply is set aside for privileged entities.</li></ul><p>Yield farming has proven to be an effective way of kickstarting a DeFi ecosystem by cultivating a network effect, bootstrapping supply-side liquidity for a project, and creating a community of stakeholders primarily made up of users of the protocol. Yield farming incentives come in many forms based on individual project goals. Still, they often involve leveraging existing infrastructure to establish unique reward schemes that are the most effective at achieving their intended purpose. DApp developers have a significant amount of creative freedom over what distinct protocol parameters they would like to leverage in their liquidity mining schemes to infuse their ecosystem with a strongly aligned community of active stakeholders.</p><h2 id="header-2">Benefit for users</h2><p>Yield Farming rewards users for provisioning liquidity or providing other value-added services to a decentralized application’s ecosystem. Yield Farmers are paid pro rata in an application’s native governance token, granting the user a higher Annual Percentage Yield (APY) on their provisioned liquidity. The rewards from Yield farming are in addition to any built-in revenue streams inherently generated, such as trading fees within a decentralized exchange and/or interest from lending in a money market. Some projects also include yield farming rewards for other services, such as user participation on the platform or supporting community, marketing, or developer initiatives.</p><h2 id="header-3">Farming on Position Exchange</h2><p>Yield Farms allow users to earn POSI while supporting Position Exchange by staking LP Tokens.</p><p>Check out our <a href="https://docs.position.exchange/products/farming/how-to-use-farms" rel="noopener noreferrer nofollow">How to Use Farms</a> guide to get started with farming.</p><p>Remember that yield farming can give better rewards than the classic Pools, but it comes with a risk of <strong>Impermanent Loss</strong>. It’s not as scary as it sounds, but it is worth learning about the concept before you get started.</p><p>Check out this reference article about <a href="https://academy.binance.com/en/articles/impermanent-loss-explained" rel="noopener noreferrer nofollow">Impermanent Loss</a> from Binance Academy to get more details.</p>

DeFi Yield Farming Explained

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