Yield farming has been cited as one of the drivers behind the decentralized financed (DeFi) sector’s explosive growth. But as a high risk, high reward undertaking, investors must have a strategy in place such as using secure and insured farming.
The Rewards and Risks of Yield Farming
As the DeFi sector continues to involve, innovative ways to earn more money from the space have been developed recently. One of these is yield farming, which is becoming more popular as allows crypto holders to earn passive income from their stash.
In fact, it has changed the way how crypto investors HODL. Rather than buying low and keeping their digital currencies under lock and key until the cryptos reach a sufficiently high price, they can now put their coins to work enabling them to earn more income in the process.
In a gist, yield farming is lending one’s funds to others through the use of smart contracts. Also known as liquidity mining, crypto owners earn fees generated by the underlying DeFi platform forplatformfor lending out their funds, which is usually in the form of cryptos.
One obvious risk of yield farming is smart contracts. Due to the nature of DeFi, many protocols are built and developed by small teams with limited budgets. This can increase the risk of smart contract bugs.
While the Annual Percentage Yield (APY) for farming is pretty attractive, the activity is not without its own set of risks. One potential risk comes in the smart contracts themselves.
In many cases, DeFi protocols are built by small teams with rather limited budgets. Due to this constraint, there is always the risk that the smart contract itself might contain bugs that might threaten the investors’ funds.
Unfortunately, bugs being present in smart contracts developed by small teams are always a possibility. In fact, bugs have been discovered even in bigger protocols that are audited by auditing firms.
Why Secured and Insured Farming Matters
The best way to manage this type of risk is to engage only in secured and insured farming. Fortunately, a lot of yield aggregator protocols have already incorporated the feature in the products.
For instance, Roseon Finance already offers fully insured farming. The company’s yield farming deposits are insured with Nexus Mutual against smart contract vulnerabilities.