Yield Farming, as its name suggests, is generating a certain percentage yield from ones initial capital which is invested in staking or lending crypto assets to generate returns in the form of a particular cryptocurrency. In the case of Dark Matter DeFi, you would be generating yields in the form of DMD.
Yield Farming has its foundations in a concept called automated market maker (AMM). Essentially, in Decentralized Finance (DeFi), there is a need for liquidity when trading any kind of asset. Yield Farming protocols give incentives to Liquidity Providers (LP), or those who lock and stake their crypto asset in a smart-contract liquidity pool. They are incentivized through a certain annual percentage yield (APY) through different means such as transaction fees, interest from lenders, or a governance token.
What is Annual Percentage Yield?
Annual Percentage Yield (APY) is the returns that a liquidity provider earns from staking or locking in their tokens for a certain period of time, such as a year. The Annual Percentage Yield is constant for everyone, but also depends on how much initial capital you have vested into the liquidity pool. Although it is constant, the more liquidity providers stake their crypto assets in the pool, the less payout or APY there will be. Let’s take the example of the FTM-DMD farm: There is a current APY of 138.85% and the total liquidity in this pool is $117,871. If more liquidity providers joined the pool, and the total liquidity increased to $200,000, for example, the annual percentage yield would also decrease by a proportional amount. Therefore, you see higher annual percentage yields on crypto assets that trade with less volume and less annual percentage yields on crypto assets that trade with greater volume. For example, The FTM-DMD farm’s APY at 138.85% is less than MIM-DMD’s APY at 182.89% because the total liquidity in the MIM-DMD pool is only $22,396. All values given are at the time of writing.
How does DMD Benefit from Yield Farming?
In Decentralized Finance (DeFi), there is no central authority providing liquidity on an exchange and facilitating the trading of two assets, so Liquidity Providers deposit a token pair, such as FTM-DMD into the liquidity pool to stimulate trading between those two assets. Yield Farming essentially allows DMD to facilitate the transfer of crypto assets from one space to another.