How can Crypto Loans help with Yield Farming?

 

Yield farming is a relatively new tool in the world of crypto that allows people to earn extra money on their holdings. It gives crypto holders the opportunity to put their finances to use and make more cash, whilst doing relatively little work.

 

Yield farming is all about adding liquidity

 

To become a yield farmer, you would need to add money to a decentralized liquidity pool (used to power DeFi projects such as lending services and exchanges). Liquidity pools are simply wallets that hold large amounts of money, which are then distributed throughout specific projects to help them run efficiently. The most well-known liquidity pool in the market is run by Uniswap; they use liquidity pools to facilitate exchanges among Ethereum-based ERC-20 tokens.

 

When you send your money to a liquidity pool, you are adding liquidity, which means you are helping the project function. As a reward, you are then given a percentage of earnings for every time your funds are used (otherwise known as a yield). You can then take your money out of the liquidity pool later on in the future, but bear in mind that some liquidity pools require you to lock your finances up for a brief time.

 

The vast majority of DeFi projects use liquidity pools, and the lifeblood of liquidity pools is yield farmers who add liquidity with their own profits in mind. This has made for a very competitive scene, where different liquidity pools offer different incentives to entice more users and gain finances. And as DeFi has been having a great year in terms of media coverage, this is unlikely to stop anytime soon.

 

Many yield farmers turn to loans to get a start

 

There are two big hurdles that stop a lot of people from becoming yield farmers. The first is that yield farming only really favours those who have large amounts of disposable crypto. This dissuades plenty of retail investors who might not hold more than a few thousand dollars in crypto. One relatively simple solution to this is to get a loan on the money they have and use the borrowed money to yield farm. All they would need to do is make sure that length of the loan is longer than the length of time they are required to lock their finances up in a liquidity pool, and therefore afterwards they could pay it back and enjoy the interest they earned through farming.

 

The second hurdle is that you cannot yield farm many popular coins like Bitcoin, Litecoin, or XRP. This is slowly changing, with cross-chain protocols like Polkadot gaining prominence, but at the moment, DeFi projects with liquidity pools work exclusively with tokens that all run on the same blockchain. And for the most part, those projects are built on Ethereum, as Ethereum has the largest ecosystem. But that means that leading assets in the crypto world like Bitcoin and Litecoin cannot be yield farmed, as their blockchains do not really have ecosystems as they are standalone coins. This leaves many crypto holders unable to make gains using liquidity pools. The solution to this is to use those coins as collateral and get a loan, which can then be used to buy Ethereum or other tokens that are compatible with the Ethereum blockchain, as they can then be used to yield farm. Like the first solution, borrowers would need to make sure that the period where they lock their tokens up is shorter than the length of the loan, but other than that it is a viable option. This is especially significant as Bitcoin has been reaching consistent all-time-highs lately, so there are bound to be people who have large stores of Bitcoin who want to put it to use and earn more money.