Blockchain and Cryptocurrency Advanced - Advantages & Disadvantages Of DeFi Yield Farming

As always, anything that has an advantage would most likely have a disadvantage. Even though yield farming is very popular in the DeFi space and has a lot of benefit in terms of passive income, it also has some disadvantages as well. Here are some advantages and disadvantages of yield farming;

Advantages

• Anyone can grow and increase the value of their investment capital by earning passive income.

• It operates on DeFi which means that the users have full control of their decisions and there are no central authority that have the control.

• Users can earn even better annual returns APR/APY compared to a lot of the conventional financial system.

• Investors can put their cryptocurrency assets to work without doing anything and earn annual yields just by locking their asset up.

• Increased profit is another advantage of yield farming because anyone can make more profit from their annual yields, especially if the price of their locked investment increases in addition to the earned income.

• No restrictions is another advantage of yield farming platforms compared to the conventional financial system. In yield farming, any user can participate and earn annual yields and passive income from their investment.

Disadvantages

• High transaction fees can be a big problem when it comes to yield farming on some platforms. A lot of yield farming platforms operates on the ethereum blockchain which is known in recent times for its high gas fees. This can be a disadvantage especially for small investors who only want to lock up a small value in dollars.

• High price volatility can also be a major disadvantage of yield farming. We all know that the cryptocurrency market is very volatile, this means that, depending on the locked cryptocurrency asset, the value can depreciate after 1 year compared to the value before the yield farming. Sometimes it is much better to hold the asset and sell when the price increases, than locking it up for 1 year.

• Hack involving smart contracts is also a problem because hackers try to exploit and take advantage of loop holes in smart contracts to steal user funds and assets.

• Liquidation risk is also a big disadvantage because it happens when the value of the provided collateral decreases compared to the price of the loan.

Conclusion

DeFi has come to stay and has brought a lot of benefits compared to the centralized conventional financial system. Not only has DeFi been on a massive rise, we have seen the emergence of DeFi projects and protocols in the decentralized finance space. Whether it is DEX protocols like Uniswap, Pancakeswap etc or other DeFi products like staking, lending, borrowing platforms, Decentralized finance has been rise and has achieved a lot of growth in recent times in the blockchain and cryptocurrency space. In the world of DeFi, yield farming is one of the most popular aspects which allows anyone to put their cryptocurrency asset to work and earn interest in return based on the estimated APR/APY. In yield farming, cryptocurrency investors can earn more passive income or maximize their investment by taking advantage of different DeFi protocols or yield farming platforms. If done properly, yield farming is a great way for any investor to gain more value and profit from their investment.