Yield
What Is Yield
In the context of cryptocurrency, "yield" refers to the earnings generated and realized on an investment over a particular period. Yield is a term commonly used in various financial markets, including cryptocurrencies, to describe the return on investment (ROI) that an investor can expect.
The concept of yield is key to decentralized finance (DeFi) and has driven the rapid growth of the DeFi ecosystem. DeFi platforms offer innovative ways to earn yield, such as through automated market makers (AMMs), decentralized lending platforms, and yield optimization protocols. These platforms use smart contracts to automate processes, reduce intermediaries, and provide transparent and secure ways to earn returns on crypto assets.
Pursuing yield in the cryptocurrency market can offer high returns, but it also comes with risks, such as impermanent loss and smart contract vulnerabilities. Market volatility can lead to large fluctuations in the value of the underlying assets, impacting the overall yield. Users must conduct thorough due diligence, assess their risk tolerance, and implement risk management techniques to mitigate potential losses.
How To Earn Yield
Yield can be derived from several sources, the most common of which includes staking, lending, and yield farming. Each of these methods involves different mechanisms and risks, but they all aim to generate returns on assets.
Calculating yield in the cryptocurrency market can be complex due to the volatility of crypto assets and the varying reward structures of different platforms. Yield is typically calculated as a percentage of the invested amount and can be expressed as annual percentage rate (APR) or annual percentage yield (APY). APY represents the annualized return based on the rewards received. APR represents the annualized return without accounting for compound interest, while APY includes the effects of compounding.
Staking
Staking is one of the primary ways to earn yield, and usually involves locking a certain amount of cryptocurrency in a wallet to support the operations of a blockchain network. In return, stakers receive staking rewards in the form of additional cryptocurrency. For example, in a Proof of Stake (PoS) network, stakers can delegate their voting rights to network validators by staking their cryptocurrencies and, in return, earn tokens as a reward.
Lending
By lending their cryptocurrencies to borrowers through various platforms, users can earn interest on the loaned amount. The yield from lending is usually fixed or variable interest paid by the borrower. The rate of return depends on the demand for the cryptocurrency being lent, the platform used, and the prevailing market conditions. Lending platforms often provide details about the expected yield, allowing investors to make informed decisions. The representative lending product comes from centralized exchanges (CEX), which runs borrowing and lending business.
Yield Farming
Yield farming, also known as liquidity mining, is a more complex method of generating yield. By providing liquidity to decentralized finance (DeFi) protocols, users can get rewards in exchange, which they can do so by supplying their cryptocurrencies to liquidity pools, to be used to facilitate trading on decentralized exchanges (DEXs). In return, they receive rewards in the form of transaction fees and additional tokens, expressed as an APR or APY, depending on the protocol's reward distribution mechanism. It is analogous for professional market makers to earn profits by providing liquidity into order book markets.