What is Compound Farming?
Compound farming is a form of yield farming within the decentralized finance (DeFi) sector, primarily in cryptocurrency markets. Yield farming itself refers to the practice of allocating or locking up cryptocurrencies in decentralized applications to earn rewards or interest. In the context of the Compound protocol, users can supply their assets to liquidity pools, where they are then made available for borrowing by others.
When users supply assets such as Ether or stablecoins to the Compound protocol, they receive cTokens in return, representing their share of the liquidity pool. These cTokens accrue interest over time, enabling users to earn passive income from their deposited assets. The interest rates are algorithmically determined based on supply and demand dynamics within the protocol.
Compound farming can be particularly attractive for users seeking to maximize their crypto holdings without needing to trade actively. By leveraging the inherent interest rates of Compound, investors can diversify their strategies and potentially increase their returns on investment. However, as with any investment, it comes with risks such as smart contract vulnerabilities and market volatility.
In summary, compound farming is an integral part of the yield farming landscape in DeFi, allowing users to earn rewards by lending their cryptocurrencies within the Compound ecosystem, thus contributing to the overall liquidity of the platform.