[EASY] Learn Yield-farming

If you're new to yield-farming, this page is for you!

Have you ever wondered how crypto markets work and how you're able to buy and sell cryptocurrencies whenever you want?

Well, it's all thanks to liquidity - the ability to easily exchange assets without waiting for someone else to take the trade.

In the world of crypto, Automated Market Makers (AMMs) provide liquidity pools, such as those found on the Uniswap protocol or 9inch, which are powered in a decentralized way by participants in the protocol. These AMM pools ensure that you can always buy and sell crypto assets whenever you want without encountering high spreads or slippage.

(By the way, AMMs = DEXs, they are basically synonymous. DEX = Decentralized Exchange)

Unlike traditional markets or Centralized Exchanges (CEXs), which use the classic order book model, DEXs like 9inch use AMM pools, where market makers never give up their ownership of their positions. The pools are filled with two tokens, and the ratio of these tokens in the pool defines the price of those two tokens relative to each other.

As a trade occurs, market participants send token A to the pool and receive the corresponding ratio of token B. This trade impacts the ratio of the two tokens, changing their relative price. If the ratio changes strongly over time, LP holders may experience impermanent loss, which means they end up owning less of the better-performing token than they originally deposited. However, if the market trades the ratio back to where the LP deposited their coins, this impermanent loss becomes impermanent, and LP holders end up with more tokens on both sides due to fees generated over time.

Anyone can become a Liquidity Provider (LP) by depositing both tokens in the corresponding ratio and earning the tiny spread as fees. LPs usually receive an LP token that represents their share of the pool on that protocol. If an LP wants to withdraw their liquidity, the protocol sends them their share of the pool back on both sides and burns their LP tokens.

LP tokens can also be transferred to other wallets, which then own a share of that LP pool. This share can be used in liquidity farming protocols by staking LP tokens and receiving yield in another token of that protocol. Yield farming lets you generate additional yield in the form of another token from the protocol, while your liquidity in the pool still generates trading fees yield.

Of course, there are risks associated with using these protocols, such as impermanent loss due to price volatility and the general risks that come with using smart contracts and cryptocurrencies. So it's important to understand the risks of any investment you make in the crypto space.