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Yield Farming

One of DeFi's goals is to bring traditional financial services to the cryptocurrency market. And one of the tools that make this possible is the yield farming system. In short, it is a way that investors can earn more DeFi tokens without having to mine or trade.
Yield farming works in a similar way to interest-bearing investments. In this way it is able to produce a passive income for token holders. Although this explanation sounds simple, the process involves relatively complex operations. And to avoid confusion, we will provide a detailed but accessible summary of these operations.
How does it work?
In some ways, the yield farming process has similarities to mining via Proof of Participation (PoS). For example, holders of DeFi tokens leave their tokens locked up on a platform. By doing so they receive income in exchange for the immobility of these tokens. Many yield farms offer yields in the double digits per year, higher than most traditional fixed income investments.
Despite the similarities, yield farming is quite different. There is no "miner," because the tokens are not mined. The LPs are also part of the yield farming, providing liquidity to the pool. In exchange, they are remunerated with rewards or interest payments.
Calculation of returns
The interest paid is calculated in annual terms. So a yield farming will pay 3% means that the investor will have 3% return after one year of investment. There are two main metrics used in calculating annual returns:
  • Annual Percentage Rate
  • Annual Percentage Rate
In Future-AI we will use APR, so we will operate on a simple interest basis.