👨‍🌾Yield Farming 101

What Is Yield Farming? 🌽

Yield farming is a means of earning interest on your cryptocurrency. Similar to depositing money into a bank, yield farming involves lending your cryptocurrency to a platform in exchange for interest or other rewards, such as more cryptocurrency assets and/or a native token. ($KNIGHT)

NOTE: None of the information or strategies outlined in our content should be taken as suggestive or prescriptive financial advice.

There are 3 ways users providing liquidity can earn: ==> Liquidity Pool Mining Fees ==> Passive Yield Accumulated From Farms ==> Appreciation Of The Assets In The LP Pair

How Does Yield Farming Work? 🤔

Also known as LP (liquidity pool) farming, yield farming works by first allowing an investor to stake their coins by depositing them into a lending protocol through a decentralized exchange or dApp.

This lending is generally facilitated through smart contracts, which are a piece of code running on a blockchain, functioning as a liquidity pool. The assets loaned to a decentralized exchange are utilized by the protocol to create a trading pair, making the two assets of the pair liquid & tradeable on their platform.

Decentralized exchanges (DEXs) generally make the majority of their profit off of the trading fees & deposit fees imposed on transactions via their exchange. This means the DEX can reward liquidity lenders with a native token without losing money. To deter users from selling their native token, the DEX provides LP farms, native pools, & raids in order to create pathways for their holders to utilize their native token as "buying/staking power". This creates a closed loop system where users can earn & compound assets for FREE without having to sell the things they want more of, creating a relatively stable source of passive income.

What Are The Risks Of Yield Farming? 😨

Many people are weary of yield farming due to the phenomenon of "Impermanent Loss". Impermanent loss (IL) is the risk that liquidity providers take in exchange for fees they earn in liquidity pools. If IL exceeds rewards earned by a user when they withdraw, it means the user has suffered a negative return compared with expected return from simply holding their tokens outside the liquidity pool. Let’s say a liquidity provider adds $100 of ETH and $100 of USDC to the liquidity pool, this is for an equal value of both tokens. The dollar amount of their deposit is $200 because their ETH and USDC are both worth $100 each. Currently, there is $1,000 of ETH and $1,000 USDC in the liquidity pool ($2,000 total value), which is a 50/50 ratio. This would give the liquidity provider above a 10% share of this liquidity pool. The user receives LP tokens (which they can deposit in a farm if available) that they can use to redeem their 10% share of the pool at any time by breaking the LP.

If the price of ETH increases by 100%, now worth $200 per ETH, the liquidity pool would have changed to 7.071 ETH and 1,414.21 USDC. This is because the ratio of the pool has changed, it is no longer 50/50, which affected the price of ETH.

Since the liquidity provider has a 10% share of the liquidity pool, they can withdraw 0.7071 ETH and 141 USDC, which equals $2820. However, if the liquidity provider had simply held their $1,000 of ETH and $1,000 of USDC, it would be worth $3000 in the same scenario. The difference between the two ($180) is the amount of impermanent loss the liquidity provider experienced when their LP was broken. A greater change in the ratio of the pool will result in a larger amount of impermanent loss. However, in the case of LP farming the user could have dropped their LP tokens into a farm that produced yield in a different token. The yield from said farm (depending on timeframes & taxes) would likely outpace any perceived impermanent loss, rendering that IL inconsequential. This is why we are not overly concerned about IL. Because we have the belief that $KNIGHT (the token earned from our farm) will be consistent and appreciate over time. KnightSwap is already the 2nd largest DEX on the Binance Smart Chain with an astounding $137 million in TVL over the course of 4 short months. This is unparalleled comparatively to other DEXs in the space. Consequently, this makes KnightSwap (in our opinion) the most undervalued asset on the Binance Smart Chain with massive potential for exponential upside. This is why we are bullish on the Wolf Den and Knight ecosystem & aiming to attach ourselves to provide added value. You are free to draw your own conclusions, we are just here to give our opinion.

Watch Our YouTube Video on Yield Farming