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Yield farming: what is it?

Yield farming is a popular term used in the DeFi space, which refers to the process of profiting from cryptocurrency ownership by actively participating in DeFi applications. The concept of profitability is based on the provision of liquidity, where users provide funds to the DeFi app by depositing their cryptocurrency assets into a smart contract, which is then used to lend or trade on the platform. In exchange for providing liquidity, users are rewarded with the platform's own tokens or other cryptocurrencies.

Farming can be very profitable, as some applications offer high rewards for liquidity providers. In addition, yield farming includes the following benefits:

Flexibility. Investors can switch between different applications and opportunities to maximize their returns.
Variety. There are many DeFi applications that offer passive income opportunities, giving investors a wide range of options.

However, it is important to note that this process of yield farming is not without risks. Some of the potential disadvantages of farming include:

Losses. If the price of the assets being bet on changes significantly, this could lead to losses for the liquidity provider.
The risk of smart contracts. DeFi applications are still in the early stages of development and are vulnerable to smart contract errors and security flaws.
Market volatility. The value of cryptocurrency can fluctuate wildly, which can affect the value of rewards earned through farming.

DeFi applications

DeFi applications are the building blocks of the DeFi ecosystem. They provide the infrastructure for decentralized financial applications and are designed to enable transactions. Here are some of DeFi's most popular applications:

Uniswap is a decentralized exchange that allows users to trade tokens without having to register with a centralized authority. The platform relies on a system of liquidity pools where users can deposit tokens and then be rewarded for their contribution.
Compound is a lending and borrowing platform that allows users to earn interest on their deposits assets or to borrow assets. The service is designed as a transparent and autonomous system, with interest rates determined by supply and demand.
Aave is a lending platform where customers place assets and earn interest or borrow assets. Aave is designed as a flexible and user-friendly platform with a wide range of assets supported and a number of features such as term loans and loan delegation.
Yearn Finance is a set of DeFi applications that offers users a range of automated crop strategies. These strategies are designed to optimize returns by automatically moving customer funds between different liquidity pools and platforms based on the latest market data.
Balancer is a decentralized exchange where customers can trade a wide range of tokens in a single transaction. The platform uses a system of liquidity pools where users can deposit tokens to provide liquidity and be rewarded for doing so.