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Just like investors deposit their money in fixed deposit bank accounts to earn interest, DeFi yield farming is an excellent way to increase earnings by investing in DeFi liquidity pools for yield rewards: more on liquidity pools in a bit. Read further to learn how yield farming works and how you can profit from DeFi yield farming in a bear market.
A liquidity pool combines two or more tokens deposited by a liquidity provider to facilitate transactions. Those who swap tokens pay transaction fees from which the protocol pays a given amount to liquidity providers. The amount paid out is calculated in annual percentage yield and annual percentage rate. It is a form of compensation for keeping your tokens to facilitate transactions on an exchange.
Returns from yield farming are calculated in APR, or APY paid in tokens from the pool. The size of your contribution to the pool determines how much you get paid. There are also risks, such as unstable prices, which could result in impermanent losses.
An impermanent loss is a difference between the price of a token in a liquidity pool and its market price. Arbitrageurs often spot the differences and buy or sell between the pool and the open market to bring the prices back to normal.
APR is the compounded interest earned in a period, which should be the duration of your stake in the pool. Most liquidity pools, however, allow liquidity providers to remove the added liquidity whenever they wish. The exchange pays out the APR earned with the amount deposited in the liquidity pool according to the current market price.
It is possible to earn through yield farming in bear markets by lending, borrowing, and farming. Earning opportunities are categorized based on the protocols involved in the process. It is important to keep in mind, however, that most platforms offer a combination of lending and borrowing opportunities.
Research points to lending, borrowing, farming, and yield aggregation as the best ways to earn through yield farming in a bear market. Each approach is explored in subsequent parts of this article.
Several centralized and decentralized exchanges allow users to lend assets. Traders borrow and use these assets to hedge and trade leverage positions. The lender earns a variable APY of around 5% for the period the funds were locked on the platform for lending.
The APY paid out to lenders often depends on the amount invested. Some centralized platforms may also specify the duration of the lent amount or the lending period. Lenders cannot withdraw their funds during this period, and they can expect a predetermined interest calculated in APR.
Lending an asset out also involves the risk of unstable prices when the asset lent out is not a stablecoin. It is, therefore, advisable to lend out stablecoins, although the APR is significantly small.
Borrowing crypto assets is more of a trading and hedging strategy than a way to do yield farming in crypto. Nevertheless, it is an essential strategy that can yield significant returns if used properly. Crypto users often borrow and lend the crypto out on platforms paying higher interest rates.
The user can then lend the borrowed assets out on platforms with a higher APR, taking the difference as profit. Borrowers must ensure that the asset they are borrowing is not super volatile. Always take out your interest and put it in stable assets to prevent losses.
Most DeFi platforms also ask for collateral when you borrow assets. You may need to do this if you are holding an asset that could go up soon. In such cases, you use your crypto as collateral to borrow stablecoins without liquidating your crypto. If the price goes up as planned, you can keep the profits and gains from trading the borrowed assets.
Yield farming is one of the most common ways to earn in the bear market. Although many traders wrongly assume it is wildly risky. Of course, some risks are involved in yield farming, but doing it right can yield high returns in a record time. With yield farming, the framer is a liquidity provider that uses its funds to facilitate transactions on a decentralized exchange.
The exchange pays farmers incentives from the fees paid by those using the pool you funded for transactions. Pandora, for example, allows you to farm the native PAN and PSR for higher rewards. There are also stablecoin farms to help you build the perfect yield farming strategy.
You can farm the native tokens and occasionally move profits to stablecoin pools to stay free from unstable prices. Yield farming in a bear market is a great way to earn because new projects often pay a high APY.
Yield aggregation is an advanced form of yield farming that can multiply your earnings in a bear market. Some developers thought it would be great if farmers could switch between farms during the DeFi summer.
The amount of profit is the criteria for switching so that the trader fund is constantly moving to more profitable farms. Yearn Finance was the first project to implement this plan and deliver some of the best yield framings in DeFi.
Today, several automated yield farming aggregators across blockchains allow farmers to spread their risk and multiply their earnings. Users can do profitable yield farming in bear markets by moving between the best protocols and platforms daily.
Yield farming in a bear market is rewarding. Still, many people confuse it by thinking they will lose money by default by going into yield farming in crypto. While tokens may be volatile, and hacks are common, doing due diligence to find the right platform will always prove worthwhile.
Pandora does not currently offer borrowing and lending services. The platform offers excellent yield farming opportunities from stablecoins to high-APR native tokens. You can move between stablecoins and other available farms to optimize your yield farming profits. If you are interested in other stable investments, check out the just-launched Pandora NFT Securities.
These materials are for general information purposes only. They are not investment advice, a recommendation, or solicitation to buy, sell, or hold any digital asset or engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the crypto asset markets can lead to loss of funds. Tax may be payable on any return and on any increase in the value of your crypto assets, and you should seek independent advice on your taxation position.
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