As the DeFi economy continues to grow, so too does the number of options you have for putting your cryptocurrency to work for you. Staking, lending, swapping, mining – all of these are buzzwords that start to make sense the more you get involved in this space.
Allow us to introduce another buzzword: yield farming.
Let’s take a look at what that means, why people choose to yield farm, and how to do it on Proton. If you’d like to skip ahead to a helpful guide about yield farming on Proton, just scroll to the bottom of this article.
What is yield farming?
Different from staking, yield farming involves you becoming a liquidity provider and locking your cryptocurrency into a smart contract tied to a liquidity pool in the form of liquidity provider tokens, earning you interest in the process. Wait, what? Let’s break it down.
Liquidity Pools = a collection of cryptocurrencies that traders can make trades out of.
Liquidity Providers = people who deposit their cryptocurrency into this liquidity pool so that other people can make trades with it.
Smart Contract = a piece of blockchain technology that records the specifics of how much cryptocurrency you deposited, at what time, and at what value.
Liquidity Provider (LP) Tokens – special cryptocurrency that represents a share of the assets you deposited into the liquidity pool.
Now, let’s back it up and try that again. Yield farming involves you depositing your cryptocurrency – in the form of a liquidity provider token – into a special liquidity pool that other traders can borrow from to make trades; you will be paid interest on your deposit, and the amount that you deposited will be recorded in a system of smart contracts.
That makes much more sense now.
Why do people yield farm?
Like most things in DeFi, yield farming is often an attempt at earning more cryptocurrency through interest payments. When you deposit your cryptocurrency into a yield farming platform, you’re hoping to earn more cryptocurrency as a payment for entrusting that platform with your funds. Some see it as a risk, since there is always a chance that the platform you’re yield farming with could suffer some sort of hack or other loss of funds, though the vast majority of companies that offer yield farming take measures to reduce this risk.
Yield farming interest rates can be quite impressive. For example, the APY paid on the XPR-USDC liquidity pool on Proton Swap changes based on current demand, but is currently at 63% APY at the time of publication.
How can I yield farm on Proton?
At Proton, we believe that everything you do with cryptocurrency should be fun and easy. That’s why we’ve made yield farming as easy as we possibly could. The process of yield farming your cryptocurrency with us is very simple, here’s how it works:
Step 2 – Deposit your cryptocurrency into your Proton wallet account. See a helpful guide here for more information.
Step 2.1 – If you don’t have Proton (XPR) or USDC yet, you’ll need to swap whatever you’ve deposited for some. Don’t worry, there are no gas fees for making swaps on Proton – see our quick guide for swapping here.
Step 3 – Provide liquidity to the USDC/XPR liquidity pool at protonswap.com/pools. Make sure the two amounts you enter are equal to each other in value. For example: if the current exchange rate for 1 USDC is 135 XPR, and you want to add 10,000 USDC, then you also need to add 1,350,000 XPR. Once you’ve added the funds and confirmed the transaction, you’ll receive LP Tokens. The amount of LP tokens will be determined by the amount you contribute and will represent your share of the transaction fees generated by that pool. You can read more about providing liquidity on Proton Pools here.
Step 4 – Go to protonswap.com/farms and stake the LP Tokens for a variable APY paid in XPR. When you click “Harvest,” your earned XPR will be moved to your wallet.
As you can see, yield farming your cryptocurrency on Proton is about as easy as it gets. Powered by the Proton blockchain, everything you do in our ecosystem is instantaneous, verified by your unique @name, and without any gas fees at all. This means fast transactions, without paying ridiculous fees.
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