Thu, 8 Feb, 2024 at 8:52 PM
In the cryptocurrency ecosystem, "yield" generally refers to the rewards generated by participating in various crypto-based products or services;
These may include yield farming, staking, liquidity provision or other similar activities, where users block 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 interest rate (APR), and can vary depending on the platform, protocol or strategy being used;
- The implementation of the strategy favours those who have large amounts of capital to deploy. A person with little capital may not make any profit at all, and in fact, may lose money on commission payments.
- Another serious problem is the security of 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 funds.
- Market risk:Cryptocurrency yields are often linked to the volatility of the cryptocurrency market. Cryptocurrency prices can experience sharp fluctuations, which can affect the value of assets locked or invested in a yield strategy.
- Platform risk: Many yield strategies are run on decentralised platforms (DeFi) which may be vulnerable to code errors, cyber attacks, exploits and other technical risks. This may result in the total or partial loss of locked or invested assets.
- Liquidity risk: When participating in yield strategies, assets may be locked up for a certain period of time, which may make it difficult to access or sell them in case of liquidity needs.
- Risk of impermanence: By engaging in strategies to provide liquidity to DeFi platforms, users may face the risk of impermanence, which is the loss of value due to changes in the proportions of assets in the pool.
Where do these rewards come from?
Yield rewards generally come from different sources, depending on the specific protocol or platform in which you are participating;
- Proof of Stake (PoS):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 exchange for this participation, holders can receive rewards in the form of additional coins as an incentive for keeping their coins locked.
- Proof of Work (PoW): 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 on 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 participation to a validator or "node" in the network and receive rewards for doing so. These rewards can come from transaction fees generated by the node or from new coins created as an incentive.
- As well as other typologies such as the Lending, DeFi Yield, Liquidity Farming, o Venture Staking, among others.
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