What You Need to Know About Yield Farming

There are a lot of terms in the cryptocurrency world; one of them is yield farming. Have you ever heard about it? Is it halal in Islam so Muslims can do it? We will talk about yield farming in this article. If you are considering yield farming, this article is for you.

What is yield farming?

First and foremost, let’s talk about its definition. Yield farming is a technique in which individuals preserve crypto assets and lend them to other users to earn crypto assets in exchange. Yield farming differs from traditional banking; it involves putting money into a liquidity pool. The activity is like saving money in the bank and you will get the benefit, which is” interest.”

What is Liquidity Pool?

Liquidity pools are pools of tokens held in blockchain systems that provide liquidity in decentralized exchanges, attempting to mitigate the problems caused by the illiquidity expected in such structures. Liquidity pools are also the word for the intersecting of transactions that produce price levels that determine whether the asset will continue to move in upward or downward if accomplished.

Furthermore, the users provide the funds in the liquidity pools and receive passive income on their deposits via trading fees calculated as a percentage of the liquidity pool they offer. The liquidity provider is a user that deposits cryptocurrencies into a liquidity pool in order to assist trade on the platform while also earning passive income on their investment.

How does yield farming work?

Yield farming is putting your crypto asset in the most optimized spot to earn you even more cryptocurrency. Yield is a financial term that refers to the profit you make from your investment. While the word Farming represents the possibility of exponential growth by finding the right place to invest it.

Is it Halal?

There are many different ways of doing yield farming.

  1. Liquidity providers; investors can undertake yield farming by supplying coins and tokens to a decentralized exchange through a liquidity provider. In return, these exchanges take a small percentage of all trades on their platform and return it to the investors. Investors may receive a very high return on their initial investment if there is a significant volume of transactions.
  2. Lending: Many borrowing and lending services will reward users who lend money to the platform. In Theer makes a crypto asset loan to the platform. This method is easy to invest in, and you can cash out anytime.
  3. Borrowing. For example, you have Ethereum laying around, and you must take out a loan. But you don’t want to cash out the Ethereum because you believe it will go up in price. You can borrow some Dai, which is a stable coin, and make your Ethereum as collateral. Let’s say you have $10,000 worth of Ethereum; you can borrow $5000 worth of Dai on a platform. You can use it until you want to pay it back. Of course, there will be interest. Whenever you want, you can pay back your Dai and get your $10000 Ethereum deposit, hoping to increase its value.

Lending and borrowing is the key to yielding farming. Earning more profit through yield farming by borrowing and lending the crypto asset definitely involves riba. The platform will charge you the interest to pay in lending and borrowing, therefore is not shariah compliant.

Moreover, users can leverage their cryptocurrency lending and borrowing to earn more profit. By using leverage, the user will borrow the cryptocurrency from a platform and then reinvest it to another platform to get leverage. Therefore, doing yield farming through lending and borrowing is not shariah compliant.

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