Generating Passive Income on your Crypto Portfolio with Yield Farming
The Velvet.Capital Mission & VisionBring financial independence- free of intermediaries and centralized parties- to the next billion crypto users & become the #1 multi-chain platform to manage your digital assets.
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Last May, we outlined the rapid growth of the DeFi ecosystem, namely innovations in crypto lending, borrowing, liquidity, etc. You can check that out here.
In that article, we touched upon the concept of yield farming, a mechanism allowing investors to sometimes generate eye-popping returns on their crypto assets.
Today, we’re going to present a quick outline of Yield Farming and how Velvet.Capital helps you earn a passive income whilst minimizing complexity, stress, and risk.
If you stick around until the end, we have a special announcement. Plus, you’ll have just enough knowledge to earn your first DeFi Dollars.
Excited? Let’s dive in :)
Yield Farming, How it WorksYield farming is one of those terms that gets thrown around in the world of crypto that many people are unfamiliar with. And when things are unfamiliar they can seem scary but in reality, it's quite simple. Yield farming is a new innovation gifted to us from the blockchain and we should embrace it. Simply put, yield farming is a way to make crypto with your crypto. You essentially lend out your crypto to different smart contracts that utilize your assets and return fees to you in the form of crypto. Specific strategies vary in complexity and risk but essentially operate the same in principle across the board.
Yield Farming allows crypto investors to earn passive income by participating in the DeFi Ecosystem. You lock up your crypto in a DeFi “protocol” (DeFi Application), which pays you yield in return. Yield is designated in terms of “APY” or Annual Percentage Yield. The longer you lock up your assets, the greater your APY. See? Not so scary.
Now let's take a look at a few ways you could generate yield.
There are 3 main ways your crypto generates yield.
LendingIn the DeFi world, you can be your own bank! What? Yeah, no really. As a coin or token holder, you can lend crypto to borrowers through a smart contract and earn yield from the interest paid on that loan. This privilege is no longer reserved for the extremely wealthy or traditional financial institutions.
For example, we’ll look at a popular protocol. Let’s say you lend out your crypto on a protocol such as AAVE. This generates a steady interest as the protocol lends out your crypto to other traders and firms. But where does that yield come from? When you’re lending out your assets you receive a (big) part of the interest that those people pay on their loans. The process is run entirely by “smart contracts” or code that automates the lending, borrowing, and interest payments.
LiquidityAs an example, let’s say you provide liquidity to a decentralized exchange (ex. Uniswap) by locking up a token pair (ex. ETH & SHIB). These tokens are added to a trading pool that facilitates trades with increased efficiency and greater speed. In exchange for providing this liquidity — along with the seamless trading experience — you are rewarded crypto. Exchanges charge a small fee to swap the two tokens. A fee is paid to liquidity providers. This fee can sometimes be paid in new liquidity pool (LP) tokens. So simply put, when you provide liquidity you receive a portion of the fees that the users pay when trading.
StakingCompared to other methods of yield farming, staking cryptocurrencies has a more ‘technical’ purpose. Rather than boosting liquidity and providing lending services, it supports the underlying blockchain itself. Simply put, you earn crypto rewards for holding certain cryptocurrencies. The rewards are received as part of the network fees that the staking maintains.
The main form of staking is by providing security to a proof-of-stake network by pledging your crypto. It gets a little more complex when discussing the specifics of the consensus mechanism, but check out this article if you want to know more.
Ultimately, each protocol comes with its own nuances, but understanding the 3 main mechanisms of Yield Farming will help you assess DeFi projects going forward.
Key RisksUnfortunately, in life, not everything is sunshine and rainbows. The mix of anonymity, lack of regulation, and high volatility can make the DeFi space a true wild west. With countless projects claiming to offer double-digit “risk-free” returns, it’s important to take such claims with a grain of salt. If it sounds too good to be true it probably is- as the old adage goes. It’s important to find vetted, trustworthy projects.
Some things to consider when vetting your favorite projects.
Rug PullThis is when the team behind a project runs away with user deposits or creates a fraudulent crypto token intending to dump it. To mitigate this risk carefully research members of the founding team along with the specifics of the tokenomics/protocol structure. Find teams that are transparent and not afraid to build in public.
Regulatory riskRegulation is still a murky area when it comes to crypto. The SEC is debating the categorization of digital assets, with many arguing crypto should be regulated as securities. Nevertheless, the decentralized nature of DeFi would allow contracts and protocols to keep running, irrespective of government intervention.
VolatilityVolatility is the degree to which the price of a crypto fluctuates. To deal with this, you should understand market cycles, and/or diversify across a variety of tokens (Velvet.Capital makes this easy).
Smart contract hacksBugs and issues within the smart contract code may allow attackers to exploit the protocol. Recent events highlight the prevalence of these attacks, emphasizing the importance of code vetting. Large protocols such as AAVE, MakerDAO, Uniswap often rely on third-party organizations such as Peckshield to audit their code (Velvet.Capital is also audited by Peckshield).
Don’t Forget to Sign-Up For Early Access & Exclusive RewardsCongrats, you’ve just finished your ‘Yield Farming Crash Course’. By now you should understand the basics of yield farming, including some of the major protocols. You’re ready to start earning a DeFi income!
You can begin by exploring the multiple lending protocols (AAVE, Curve etc.) to start earning interest on your crypto. Once you’re more comfortable, consider providing liquidity on Uniswap or another DEX (Decentralized Exchange).
Ultimately the options are endless, and it’s all up to you!
But remember, due diligence is the most crucial part of the entire process. Uncovering trustworthy DeFi projects is a time-consuming yet rewarding task. It involves spending hours analyzing whitepapers, keeping up with the latest developments, and allocating crypto effectively to maximize yield. In the rapidly evolving DeFi ecosystem, it often seems difficult to grasp everything going on. If only there was a solution to automate the entire process.
Crypto Investing Like Never BeforeVelvet.Capital is a cross-chain DeFi Asset Management protocol that helps people & institutions create index funds, portfolios and other structured financial products as well as manage their portfolios on-chain. With a few simple clicks you could create your own crypto index (think S&P 500 for Crypto)- gaining you exposure to a variety of tokens without needing to make all the individual trades or you could create any number of other structured financial products. We also provide solutions to professional investors and institutional clients (think DeFi-As-A-Service).
The diversified approach means you don’t stress about picking the “right” coin, allowing you to comfortably ride the wave without falling off. You can start earning a monthly yield from your crypto holdings directly on the platform. A steady income to your wallet with none of the hassle — all from one account.
Velvet.Capital does the grunt work of vetting projects and yield farming protocols on your behalf. There’s no easier way to get started. You can capture the full upside of a crypto boom, collect monthly checks and minimize the risk of total wipeout due to diversified crypto indexes. We make it seamless to participate in the DeFi ecosystem, whether you’re a complete novice or an institutional trader.
Perhaps most importantly, we’re a completely decentralized project meaning we run on automated smart contracts (just like your favorite protocols).
Join our waitlist today and be eligible for token airdrops (Free Tokens!), generous prizes, and early access to the future of crypto.
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Until next time,