“DeFi & Yielding”

 

In recent years, DeFi has discovered new and creative ways to permit the borrowing and lending of crypto assets. In doing so, it has created numerous decentralized lending platforms for the world of blockchain. One of the many facets that have propelled DeFi to the heights it has managed to reach is the concept of “yielding.” More specifically, “yield farming,” which has helped DeFi projects pay their investors yield.

 

Unless you are savvy with financial lingo, you may be asking “What exactly is yielding?” Well, you will find your answer here.

 

What does it mean?

 

The term “yield” refers to earnings that are generated and realized on an investment over a specific time span. It is typically conveyed as a percentage that draws from either the invested amount, the current market value, or the security’s face value. There are various types of yields:

 

  • …on Stocks
  • …on Bonds
  • …to Maturity
  • …to Worst
  • …to Call

 

Yield includes the earned interest or received dividends that come from retaining a particular security. Yields could be classified as known or anticipated; whichever it is will depend on the valuation of the security, be it fixed or fluctuating.

 

Generally speaking, yield measures the cash flow that an investor obtains on the amount they invest in a security. Its computation is mainly on an annual basis, though quarterly and monthly yields are sometimes used. Yield should not be confused with “total return,” which is a comparatively more comprehensive ROI measurement.

 

Yield is calculated with the following formula:

 

Yield = Net Realized Return / Principal Amount

 

What does it tell me?

 

A higher yield value is indicative of an investor being able to recover higher amounts of cash flows in their investments. Because of this, a higher value is often seen as an indicator of higher income and much lower risk.

 

However, one should have a proper understanding of the calculations used. A high yield may stem from the security’s market value declining. This in turn decreases the denominator value utilized in the formula and boosts the calculated yield value. And this even when the security’s valuations are experiencing a significant drop.

 

Dissecting yield farming

 

In the crypto space, yield farming is any attempt at putting crypto assets to work and producing as many returns as possible on them. Put simply, a yield farmer may move assets around and constantly chase whichever pool offers the best annual percentage yield (APY) every week. As a result, this could lead to sometimes moving into riskier pools. That may sound intimidating, but the average yield farmer can easily handle risk.

 

Yield farming is essentially a reward scheme. One that has captured the attention of the DeFi crypto space during this last year. When you compare it to traditional investing, it is similar to yield on a bond or even a dividend. Much like a conventional dividend that pays stock or bond, DeFi token yields tend to fluctuate depending on the way in which these projects and exchanges produce them.