This is the foundation of how an AMM works, but the implementation can vary widely depending on the network.
The use of these platforms incurs fees, which are then paid out to liquidity providers according to their share of the liquidity pool. This pool powers the DeFi protocol, where users can lend, borrow, or exchange tokens. Liquidity mining begins with liquidity providers depositing funds into a liquidity pool. It typically involves liquidity providers (LPs) and liquidity pools. Yield farming is closely related to a model called automated market maker (AMM). The rewards you may receive depends on several factors, such as the type and amount of assets you lend, the duration of your participation, and the overall demand for the platform's services. But the basic idea is that a liquidity provider deposits funds into a liquidity pool and earns rewards in return. It's easy to see how complex strategies can emerge quickly. Yield farmers may use a liquidity pool to earn yield and then deposit earned yield to other liquidity pools to earn rewards there, and so on. In exchange for providing liquidity and becoming a liquidity provider (LP), investors may receive the platform's native tokens, governance tokens or even a portion of the platform's revenue in blue chip coins such as ether. These DeFi platforms can be decentralized exchanges (DEX), lending and borrowing platforms, yield aggregators, liquidity protocols, or options and derivatives protocols. Instead of letting these assets sit idle in their crypto wallet, they can put their coins to work by lending or depositing them on various DeFi platforms. Let’s say an investor owns coins like ether (ETH) or stablecoins like DAI. Yield farming has become popular because it offers the potential to earn higher returns compared to traditional saving methods. Yield farming, also known as liquidity mining, refers to the lending or staking of cryptocurrency in decentralized finance (DeFi) protocols to earn additional tokens as a reward. Yield farmers can strategically move their assets across multiple DeFi platforms to capitalize on their cryptocurrency holdings. It entails lending your funds to other participants in the DeFi ecosystem and earning interest on these loans by utilizing smart contracts. Yield farming is a way to put your cryptocurrency to work, earning interest on crypto.
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