Yield

In the cryptocurrency ecosystem, "yield" generally refers to the rewards generated by participating in various crypto-based products or services.

What do you need to know?

• Characteristics of Yield
• Where do these rewards come from?

Characteristics of Yield

These can include yield farming, staking, liquidity provision, or other similar activities, where users lock up or lend their crypto assets in exchange for earning additional tokens or rewards.

Yield in the cryptocurrency ecosystem is often expressed as an Annual Percentage Yield (APY) or an Annual Percentage Rate (APR), and can vary depending on the platform, protocol, or strategy being used.

Risks of Yield

• The implementation of the strategy favors those who have large amounts of capital to deploy. A person with little capital may see absolutely no gains, and in fact, may lose money paying fees.
• Another serious problem is the security of the smart contracts on the yield farming platform. If the platform has not been properly audited, there is a risk of theft of funds and partial or total loss of them.
• Market risk: cryptocurrency yields are often tied to the volatility of the cryptocurrency market. Cryptocurrency prices can experience sharp fluctuations, which can affect the value of the assets locked or invested in a yield strategy.
• Platform risk: many yield strategies are carried out on decentralized platforms (DeFi) that can be vulnerable to code errors, cyberattacks, exploits, and other technical risks. This can result in the total or partial loss of the locked or invested assets.
• Liquidity risk: when participating in yield strategies, it is possible that assets may be locked for a certain period, which can make them difficult to access or sell if liquidity is needed.
• Impermanent loss risk: When participating in strategies to provide liquidity to DeFi platforms, users may face the risk of impermanent loss, which is the loss of value due to changes in the proportions of the assets in the pool.
  
  

Where do these rewards come from?

Yield rewards generally come from different sources, depending on the specific protocol or platform you are participating in.

• Proof of Stake: in some cryptocurrency protocols that use the PoS mechanism, cryptocurrency holders can lock their coins as collateral to secure the network and validate transactions. In return for this participation, holders can receive rewards in the form of additional coins as an incentive for keeping their coins locked.
• Proof of Work: in protocols that use the Proof of Work (PoW) mechanism, miners who contribute their computing power to solve complex mathematical challenges and secure the network can receive rewards as an incentive for their work.
• Staking: holders can lock their coins in a specific platform or smart contract for a certain period of time. In return, they can receive rewards in the form of additional coins or interest for their participation.
• Delegation: in some PoS protocols, cryptocurrency holders can delegate their stake to a validator or "node" on the network and receive rewards for doing so. These rewards can come from the transaction fees generated by the node or from new coins created as an incentive.
• As well as other types such as Lending, DeFi Yield, Liquidity Farming, or Venture Staking, among others.