How yield farming on decentralized exchanges can become less risky

DeFi brings an opportunity to access the yields unseen in traditional finance, now with the competitive risk levels.

The DeFi industry has been gaining momentum since 2020, offering a new perspective on the world of finance and a new way for investors to make money. 

In its essence, DeFi, also known as Decentralized Finance, is an ecosystem of applications and services built on public blockchains.

Yield farming and staking are gaining momentum on the DeFi market right now.

Farming, but with yields

Yield farming, often referred to as “liquidity mining,” is a lucrative way to make money using the cryptocurrency you already have.

Simply put: you lend your crypto assets to a decentralized platform through smart contracts and without intermediaries,  and you get rewarded for it. 

This process is a so-called automated market maker (AMM) model, but in crypto: it involves liquidity providers, users who deposit their assets, and liquidity pools, all the assets at decentralized exchanges available for trading.

In most cases, liquidity providers get governance tokens in return for depositing their crypto assets.

This process resembles the way bank loans work: the bank loans a person money and expects it to be paid back with interest. With yield farming, crypto investors act like banks.

DeFi doesn’t always mean safe

Even though DeFi is a great way for investors to make money, especially if they use complex strategies like borrowing money from decentralized platforms and staking it somewhere else at a lower percentage than their yield returns, it is not as safe as you might think.

Because this technology is decentralized, a single technical error could jeopardize the entire chain of blocks, the so-called “domino effect.” Given that blockchain transactions are irreversible, you can lose all of your assets. 

Another major issue is volatility. During volatility peaks, the money you borrowed from the smart contract might be liquidated, leaving you with nothing.

Leveraging stablecoins

That’s why DeFi companies are eyeing stablecoins for their liquidity pools. 

Stablecoins are pegged to the value of the dollar, or a commodity, which makes them a lot less volatile than other trading pairs. Stablecoins might be a safer way for newcomers to try leveraged yield farming.

And some companies offer both — digital currencies and stablecoins, expanding the potential investors’ base and providing more security to the liquidity pools.

One of these companies is Kalmar, a DeFi bank with a range of products, including leveraged interest and NFT fundraiser.

Kalmar uses leveraged stablecoin farming utilizing funds supplied by other users, which, according to the company, enables returns between 40% and 90% interest per year.

The platform offers an opportunity to use leveraged yield farming products with Binance Coin (BNB) or with its stablecoin equivalent, BUSD, or both. 

According to Kalmar, investors can keep control of their private keys through integrating browser wallets such as Metmask, Math Wallet, WalletConnect, Binance Chain Wallet, SafePal APP Wallet, and Trust Wallet.