A farmer can take one grain of corn and plant it in his farm. If the farmer can be patient and do the right things such as watering the planted corn seed, cutting off weeds, removing pests and insects, and adding the necessary fertiliser, the planted grain of corn will grow, bud, and produce heads of corn.
Each corn head often contains thousands of grains of corn. When harvested, the farmer can now take the corn from just one head and re-plant. This one head can be used to farm a larger field, which will yield more corn heads that can again be planted, and so forth. Ultimately, the farmer can have a large plantation of corn from that one grain of corn he had planted.
This idea of corn farming is the same concept in Yield Farming, which is also known as Liquidity Mining. In Yield Farming you can take one crypto and plant it in a DeFi pool, harvest the yield, which you can re-plant, and then harvest and re-plant, and so forth. By this your crypto will multiply to yield a crypto plantation of abundance.
This is one of the main reasons why many millionaires have been born through DeFi activities since it started mid-2019. The tempo has not slowed down as more and more farms with lucrative yields keep emerging in the DeFi space.
Lecture 1.0.0. The Principle of Yield Farming
The concept of yield farming is as follows:
(1). Supply your crypto to a pool to provide liquidity
(2). The supplied crypto is used by borrowers and traders and you receive interests for using your crypto
(3). The interests you received can be added to more liquidity pools in order to generate more yields
(4). The yields can now be staked into blockchain pools to generate further profits.
By these activities, the yields you get from your crypto multiply and produce abundance.
The principle of liquidity provision in yield farming is that a liquidity pool accepts a crypto base-pair known as liquidity base-pair (or simply liquidity pair) to maintain price equilibrium in the pool.
It works this way:
(a). You need two different cryptocurrencies to start yield farming.
(b). The two different cryptos are paired up to form a base-pair.
(c). The base-pair must be in a ratio specified by the yield-farm protocol in order to maintain price equilibrium in the pool.
(d). Once the base-pair in the correct ratio is obtained, you then deposit the base-pair in a pool to provide liquidity for transactions.
(e). Traders and borrowers use the supplied base-pair for transactions and you receive interests for every transaction that involves your supplied base-pair.
Therefore, each yield farming platform does stipulate the ratio (known as liquidity ratio) by which each of the cryptos will be paired to form the base-pair.
In most platforms, the commonly used liquidity ratio is 50/50; that is, each of the two cryptos that form the base-pair must be equal in value. For example, a 50/50 liquidity pair of Ether-Dai means if you have 2 Ether, you will need the equivalent amount of Dai to be able to form a base-pair for liquidity provision.