What is yield farming?

| November 17, 2023

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Yield Farming

DeFi yield farming has emerged as an increasingly favoured method of generating passive income through cryptocurrencies in the web3 ecosystem. What is yield farming? Yield crypto farming encompasses the practice of lending cryptocurrency, predominantly on the Ethereum network.


In traditional banking systems, debts are extended with fiat money, and the borrowed amount is repaid with interest. Similarly, in yield farming crypto, the principle remains unchanged. Instead of leaving cryptocurrency idle in an exchange or wallet, it is lent out through Decentralized finance protocols or locked into Ethereum smart contracts, aiming to yield a return on the invested crypto assets.

Key Takeaways:

  • Yield farming enables users to deposit and lock their crypto assets for a predefined duration to earn rewards in the long term.
  • EVM-based smart contracts actively manage the yield farming protocol.
  • The interest rate varies from a few percentage points to triple digits. In 2022, yield farming protocols offered APYs of up to 3,000%.

What is yield farming? Explained! !

Yield farming is a method of earning rewards by depositing and locking up your cryptocurrency or digital assets in a decentralized application (DApp). This practice is very similar to the interest earned on assets when deposited in a traditional financial institution. However, unlike the traditional financial system, where dominant institutions tend to claim the majority share of rewards, DeFi projects are compelled to compete with one another. It results in a comparatively smaller allocation of rewards for the DeFi platforms, and a larger chuck is allocated to the yield farmers. As a result, yield crypto farming creates a more competitive and distributed landscape for earning rewards in the decentralized finance space.

How does decentralized finance crypto farming work?

Yield farming initiatives enable crypto holders to store and lock their cryptocurrency tokens for a specific duration and earn recurring rewards in return. These decentralized finance projects utilize smart contracts to secure and distribute interest rates that range from modest percentages to substantial multiple-digit figures. In numerous instances, the locked crypto tokens are lent out to other users, who, in turn, pay interest on their crypto loans, with a portion of the proceeds benefiting the respective liquidity providers. Alternatively, the locked crypto tokens are vital in providing liquidity for decentralized exchanges to facilitate trading activities. These decentralized exchanges often employ automated market makers that require locked tokens to fulfil buy and sell orders. As a result, yield farmers generate passive income through transaction fees. Apart from trading fees, users frequently receive other incentives for providing liquidity, such as governance tokens and newly minted tokens. Prominent DeFi platforms like Uniswap (UNI) offer users the opportunity to yield farm various types of tokens across different blockchains, including Ethereum, Bitcoin, and Polygon. UNI employs a unique algorithm that adjusts prices only when the loss is smaller than the profit, allowing for more liquidity creation compared to typical platforms.

General types of yield farming:

Type 1: Supplying liquidity Providing liquidity entails depositing equivalent quantities of two cryptocurrencies into a liquidity protocol. All liquidity providers (LPs) with the same combination of assets contribute to a shared pool. Whenever a transaction occurs between the two cryptocurrencies, liquidity providers receive a portion of the trading fees generated by the platform. This distribution of fees serves as a reward for liquidity providers participating in the liquidity provision process. 

Type 2: Enabling Staking Staking refers to the act of storing and locking up a specific quantity of coins within a blockchain to contribute to the security and functionality of the network. Users who engage in staking their crypto tokens are typically offered additional coins as a form of motivation. These rewards can originate from transaction fees, inflationary mechanisms, or other predetermined sources established by the underlying protocol. An illustration of this can be observed in the Ethereum network, which operates on a Proof of Stake consensus mechanism, utilizing staked funds to safeguard the network. 

Type 3: Supporting Lending Decentralized finance further enables individuals and projects to access cryptocurrency loans from a pool of lenders. Users have the opportunity to provide loans to borrowers through lending protocols, thereby earning interest in exchange for their participation. This arrangement facilitates a mutually beneficial relationship where borrowers can access the funds they need while lenders generate passive income through interest accrual.

How to calculate yield farming returns?

The return calculations across platforms will differ based on various parameters. In certain instances, the pool creator has the authority to manually determine and adjust the annual percentage rate (APR) or annual percentage yield (APY) at their discretion. Alternatively, the protocol itself utilizes smart contracts to establish and modify the APR. Notably, certain protocols like Yearn Finance evaluate APRs from different yield farming platforms and allocate tokens to the pool offering the highest APR. Additionally, liquidity providers often earn tokens through transaction fees, resulting in pools with higher trading volumes offering greater rewards.

How to earn with Defi?

Improved Liquidity Prospective crypto-holders often question which yield farming strategies are the most profitable and efficient. The answer primarily depends on the level of asset and time commitment one is willing to dedicate to yeild farming crypto. While certain high-risk strategies may offer substantial returns, they typically require a comprehensive grasp of decentralized finance platforms, protocols, and intricate investment chains to yield optimal results. For investors seeking passive income without significant investments, a viable option is to allocate some of their crypto-holdings into a trusted platform or liquidity pool and monitor its earnings. Once a solid foundation is established and confidence is gained, expanding investments to other avenues or directly purchasing tokens becomes a possibility. Similar to any digital asset investment, the outcomes are directly influenced by the level of effort and resources invested. It is crucial to thoroughly understand the underlying architecture, protocols and platforms involved before making any investment decisions. Additionally, you must ensure that the devised strategy aligns with the available crypto-currency and time commitment for yeild farming. Yield crypto farming entails a high-risk, high-reward investment strategy where potential gains can be significant, but losses can occur just as swiftly. If you’re considering venturing into yield farming, compiling a yield farming crypto list that highlights the highest yield farming rates and associated risks for each protocol serves as an excellent initial step. This list will provide valuable insights into potential returns and the potential challenges or vulnerabilities associated with each protocol, assisting you in making informed decisions and managing risks effectively.

A comprehensive list of the best platforms for yeild farming:

To maximize returns on their staked funds, yield farmers frequently leverage a diverse range of decentralized finance platforms. These platforms provide a multitude of incentivized lending and borrowing options through liquidity pools. It allows farmers to explore different strategies and opportunities. By strategically utilizing various platforms, yield farmers can enhance their overall yield and make the most of their invested funds. 

Top 1: Uniswap Uniswap is a decentralized exchange (DEX) and automated market maker (AMM) that offers crypto holders the ability to swap nearly any ERC20 token pair directly without the involvement of intermediaries. 

Top 2: AAVE Aave is an open-source, non-custodial decentralized lending and borrowing protocol that facilitates the creation of money markets. Through this protocol, you can borrow assets while earning compound interest by participating in lending activities. 

Top 3: Instadapp Instadapp allows you to effectively manage and construct DeFi portfolios, while developers can leverage the platform to build robust DeFi infrastructure. 

Top 4: SushiSwap SushiSwap is a fork of Uniswap. It offers a range of services, including multi-chain automated market maker (AMM) functionality, lending and leverage markets, on-chain mini Dapps, and a launchpad for new projects.

Conclusion

Yield farming holds significance within the dynamic Decentralized finance ecosystem and actively fosters the growth of novel decentralized financial services. Participants in yeild farming crypto, by offering liquidity to decentralized platforms, play a crucial role in enhancing the overall liquidity and effectiveness of the DeFi market. Moreover, it empowers individuals to earn rewards in the form of cryptocurrencies for their active engagement. Furthermore, yield farming promotes financial inclusivity by enabling anyone with an internet connection and cryptocurrency to partake in the revolutionary DeFi movement. It presents an alternative to conventional financial systems, granting individuals greater autonomy over their funds and the opportunity to generate passive income. Through yield Crypto Farming, individuals can actively shape and benefit from the decentralized and accessible nature of the DeFi landscape.

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More on Crypto

As we continue constructing a fully regulated digital asset custody platform, ensuring secure storage for both crypto and fiat assets remains a critical priority. 

To facilitate the last checkpoint of enabling institutions to convert their digital asset treasury into fiat currency, we’re expanding beyond pure wallet infrastructure and integrating seamless fiat off-ramp capabilities for our partners.

We’re thrilled to announce our partnership with Encryptus, licensed and compliant off-ramp solutions tailored for institutional clients. This collaboration elevates Liminal’s service offerings by empowering our partners to convert their digital asset treasuries into fiat currencies efficiently.

Integrating A Seamless Off-Ramp Solution

The digital asset ecosystem historically faced friction points when transitioning between fiat and cryptocurrencies. Off-ramp solutions address this pain point by enabling efficient and streamlined conversion between asset classes, minimising value loss and simplifying compliance processes.

Here’s how off-ramp changes the game:

  • Reduced Friction: Frictionless conversion minimises delays and operational complexities associated with traditional fiat-crypto exchange methods.
  • Enhanced Efficiency: Streamlined workflows expedite asset conversion, increasing speed and cost-effectiveness for institutional and individual users.
  • Optimised Value Preservation: Advanced off-ramp solutions prioritise minimising price slippage and value loss during conversion, protecting user portfolios.
  • Simplified Compliance: Integrated compliance features navigate regulatory complexities, ensuring adherence to relevant financial regulations.

With our partnership with Encryptus, we have embedded their institutional-grade APIs, connecting their off-ramp solution within Liminal’s wallet and custody platform. 

This integration simplifies our clients’ liquidation requirements while keeping their assets secure and more:

  • Effortless Digital Asset to Fiat Conversion: Our partners will be able to access treasury management and facilitate business payments in 54 countries and individual payments in an extensive network of 80+ countries.
  • Streamlined Compliance and Regulation: Our partners will be able to leverage Encryptus’s rigorous licensing and compliance framework, ensuring adherence to stringent financial regulations.
  • Enhanced Platform Value: We will be able to expand the functionality of the Liminal custody solution, attracting institutional users seeking comprehensive digital asset management capabilities.

Moving Towards A Robust Off-Ramp Partnership With Encryptus

The partnership between Liminal and Encryptus earmarks a significant step forward in secure digital asset custody, representing a shared commitment to pushing compliant practices while supplying institutions with easy access to convert their digital assets to fiat. 

For Encryptus, the opportunity to integrate with Liminal’s established platform presents a chance to reach a wider audience and scale their innovative off-ramp solutions to new heights. By streamlining fiat conversion within Liminal’s secure custody infrastructure, Encryptus gains access to a trusted network of institutional users seeking seamless and compliant treasury management.

For Liminal, this collaboration reinforces our dedication to partnering with companies that demonstrably prioritise clear governance and robust policy frameworks. By aligning with Encryptus’s stringent compliance standards, we reaffirm our commitment to building a secure and sustainable future for digital assets, where trust and regulatory certainty go hand-in-hand.

January 22, 2024

Hello world, it’s that time of the month when we share the biggest security breaches in the world of Web3 through our Security and Regulatory Newsletter. 

Liminal believes in optimizing security and custody practices globally across the Web3 industry. Through our Newsletter, we highlight security, regulations, and compliance incidents that have happened in the past month and how one can follow better Security practices to safeguard their digital assets. 

We will also highlight regulatory changes that might have happened globally, which were significant to the overall ecosystem.

Dive in and get a detailed analysis of everything security and regulation in the domain of web3 with Liminal’s Monthly Security and Regulatory Newsletter.

Web3 Security Compromises in January

Abracadabra exploited for almost $6.5 million, Magic Internet Money stablecoin depegs

The Magic Internet Money ($MIM) stablecoin has lost its dollar peg again, dipping all the way below $0.77 in a flash crash before returning to around $0.95.

The depeg appears to be related to an exploit of the Abracadabra lending protocol, which allows people to borrow $MIM. An attacker exploited an apparent flaw in the platform’s smart contracts to drain around $6.5 million.

Goledo Finance hacked for $1.7 million

Goledo Finance, an Aave-based lending protocol, was exploited through a flash loan attack. The attacker stole assets estimated by CertiK to be around $1.7 million.

Goledo Finance contacted the attacker to offer a 10% “bounty” for the return of the remaining assets. In a message on January 29, the attacker wrote: “I hacked Goledo and want to negotiate.”

Socket service and its Bungee bridge suffer $3.3 million theft

The Socket cross-chain infrastructure protocol was hacked for around $3.3 million in an attack that exploited its Bungee bridge. The thieves were able to exploit a bug that allowed them to take assets from those who had approved a portion of the system called SocketGateway.

A little over 700 victims were affected, and the highest loss from a single wallet was around $657,000. 121 wallets lost assets priced at more than $10,000.

On January 23, the protocol announced they had recovered 1,032 ETH (~$2.23 million) of the stolen funds.

Web3 Regulatory Practices for January

The EU Imposes Stricter Due Diligence Rules for Crypto Firms

On Jan. 17, the European Council and the Parliament came to a provisional agreement on parts of the Anti-Money Laundering Regulation (AMLR) that now extends to the crypto sector.

Under the new rules, cryptocurrency firms will be required to run due diligence on their customers involving a transaction amounting to €1,000 ($1,090) or more. 

However, the agreement isn’t final yet as it has to be first officially adopted by the Council and Parliament before the rules can be applied.

So, after the EU passed its landmark MiCA regulation last year, which clarified rules about cryptocurrencies, regulators are now targeting the space with tighter controls. 

While these regulations bolster security and trust in the crypto market, potentially attracting more cautious investors and combating financial crimes, they also present challenges. 

The US State of Virginia Introduces Digital Assets Mining Rights

Recently, the Virginia State Senate introduced Bill No. 339, which outlines regulations for the transactions and mining of digital assets and their treatment under tax laws. 

The legislation exempts individuals and businesses engaged in crypto mining activities from obtaining money transmitter licenses. Additionally, it protects miners from any discrimination. 

Issuers and sellers of crypto are also exempted from securities registration requirements if certain conditions are met. Moreover, those offering mining or staking services are not to be classified as “financial investment” but must file a notice to qualify for the exemption.

The bill further incentivizes crypto’s use for everyday transactions by offering tax benefits. Under this, up to $200 per transaction can be excluded from an individual’s net capital gains or gains derived from using crypto to purchase goods or services, starting from Jan. 1, 2024.

Key Takeaways:

  • Hackers continue to exploit vulnerabilities in DeFi protocols and cross-chain bridges, highlighting the need for robust security measures.
  • Regulatory frameworks are evolving rapidly, with stricter AML rules and supportive legislation for emerging technologies like crypto mining.
  • Staying informed about these developments is crucial for navigating the digital assets market safely and responsibly.

Stay #LiminalSecure

These events highlight the constant evolution of Web3 security and regulation. You can confidently navigate this dynamic landscape by staying informed and prioritizing security best practices. 

At Liminal, we’re committed to empowering institutions to unlock the full potential of digital assets without compromising security or compliance norms with our robust custody and wallet infrastructure solutions. Join us on this journey towards a safer, more accessible future for digital assets.

January 15, 2024

Buckle up as we’re about to take a trip down memory lane. 

The year 2023 was a wild ride that showed signs of a plummeting market, groundbreaking innovation and regulatory hurdles. 

Contrastingly, in the same year, we saw no market-shattering crashes. Financial institutions extending an olive branch, key jurisdictions unlocking the doors to blockchain technology. 

Simultaneously, at Liminal, we experienced significant breakthroughs, re-engineering our positioning and becoming a pioneer in digital asset security with bank-grade custody. 

We took major strides this year, right from building comprehensive products to becoming a qualified custodian, from revamping our brand design to expanding our offices in newer locations, from partnering with hyper-local communities to onboarding a diverse set of clients,  we did it all. 

So, let us take you through everything we accomplished in 2023 and what the future holds.  

Liminal Became A Qualified Custodian

One of the prominent moves we made this year was to change our positioning as a regulated custodian from being a wallet infrastructure platform. 

We got two licenses in key jurisdictions to operate as a regulated custodian. 

The first one came from Hong Kong, where we acquired the TCSP license issued by the SFC, which oversees and regulates financial activities to ensure compliance with legal and regulatory obligations. 

Our next license came in the MENA region, where we got In-Principle Approval for the FSP license granted by the FSRA, a governing body in ADGM, to establish a progressive financial services environment. 

Both these licenses paved the way for Liminal to push its wallet infrastructure and offer bank-grade custody to institutions looking to operate in these particular regions. 

Liminal Introduced A Suite of Products & Features

Continuing our building spree, we launched new products and integrations to broaden the existing infrastructure and added more parameters of security, scalability and sustainability. 

Staking-as-a-Service

Liminal launched staking for institutions to eliminate the risks involved in running staking nodes and the vulnerabilities in hot wallet transfer. 

Hence, we introduced an industry-first mechanism of cold wallet staking to ease staking for institutions and secure assets explicitly.  

Whitelabel Solution

Accelerating the go-to-market time for organisations looking to build a secure and customisable application, Liminal launched its whitelabel solutions

Targeted to help organisations meet security standards, manage assets with maximum control, and add their custom branding to give it a personal touch. Our whitelabel solution is a first-in-class custodian-developed solution for institutional grade custody.

Smart Consolidation

We are building not just secure custody but also automation-based features to eliminate manual errors, increase the throughput of transactions and scale institutional wallets. 

Taking this ahead, we launched the Smart Consolidation feature to automatically calculate all the active addresses and consolidate them into a single address. With this level of automation, managing multiple addresses becomes uber easy for wallet teams. 

Travel Rule 

To limit the use of cryptocurrencies for activities like money laundering and terror financing by regulatory bodies, travel rule was mandated for institutions to follow. 

Continuing the latest compliance integration policy, Liminal partnered with Notabene to introduce Travel Rule, enabling institutions to manage counter-party risk and extend the process of due diligence right from the Vaults dashboard.   

Liminal Accured List Of Security Certifications

Following our ISO certification for data privacy and risk management, we added two new security certifications to fortify our systems and build trust for our clients. 

Liminal Achieves Crypto’s Highest Security Mark: CCSS Level-3 Certified

Cryptocurrency security lacked a gold standard, creating a vulnerable ecosystem. Enter the CryptoCurrency Security Standard (CCSS), setting the bar for auditing and certifying custodian infrastructure and establishing levels of trust and confidence for investors. 

Liminal became only the second wallet infra platform and the first regulated custodian to be accredited with Level-3 certification, deeming wallets, transfer environments, workflows and engines safe and secure. 

Liminal Reciueved SOC 2 Type II Certification

To tackle threats in institutional-grade security, organisations’ SOC has been identified as the primitive compliance standard for service organisations to handle customer data.

Liminal successfully attained SOC 2 Type II certification, validating its setup of security controls & compliance processes to be industry standard. 

Liminal Level Up

Liminal unveiled its most significant platform upgrade ever, revolutionising the future design standard of a qualified custodian. This level-up activity included revamping our website and product UI, giving a completely new look and feel to not “Liminal” but “Liminal Custody”. 

The Liminal level-up activity was a strategic step and the biggest one for us this year to create an intuitive, inviting and tailored experience for our clients. 

Liminal Reached New Borders

We spread out our operations this year, reaching new borders and onboarding a new wave of institutions across gaming, DeFi, HNI wealth, treasuries, and exchanges! From Indonesia and Africa to India, UAE, and Korea, we are setting up custody operations worldwide. 

This isn’t just a roster of clients; it’s a network ready to spark connections, collaborations, and shared success to further the definition of secure assets. 

Liminal Collaborated With Law Enforcement Agencies

The best and the proudest moment of Liminal for this year was when we collaborated with CBI & Himachal Prashesh police department to aid them in seizing digital assets. 

This partnership put us on the map, as we became the first point of contact for LEAs in India, and we standardised the process of secure seizure of digital assets. Leveraging our expertise, we enabled a safe space for officers to learn the basics of custody, contributing to a safer digital landscape.

Team Liminal Grew Bigger

Building such a massive infrastructure, prioritising security and compliance over everything else, we had to grow the team to build at pace and expand at an even higher level. Not only did we grow in team numbers, but we also elongated our footprint to new destinations. 

Team Liminal went from 32 to 70 with 5 new offices in Mumbai, Ahmedabad, Hong Kong, Singapore and ADGM, setting up our custody operations steadfastly. 

What’s To Look Out For In 2024

We are excited to announce that our commitment to integrating the most secure digital asset wallets with a cutting-edge custody platform is swiftly becoming a reality. 

The upcoming year, 2024, will serve as a testament to this transformative journey. Moving beyond self-custody, we are constructing a comprehensive infrastructure encompassing both custodial and non-custodial wallets. Exciting products are set to launch starting from the first week of January, some of which are: 

  • Official Custody Platform Launch
  • Liminal’s Off-Exchange Settlement Hub
  • Secure Custody of Real-World ‘Tokenised’ Asset

The Web3 space has evolved explicitly this year, pushing the narrative of secure digital asset custody and security, introducing new regulations and compliance standards, licensing VASP providers and standardising the use of custodians as a trusted third party. 

At Liminal, we took major strides this year, from building comprehensive products to becoming a regulated custodian, from revamping our brand design to building the full infrastructure of custodial and non-custodial wallets.

January 5, 2024

Find Out How You Can Benefit From A Fully Self-Custodial Wallet Architecture