We understand you’ve come to learn more about yield farming, but this is the last straw before we get to the heart of the matter. So, DeFi, as we mentioned earlier, is an umbrella term for dApps that facilitate financial transactions in the decentralized economy, using blockchain technology as the underlying technology.
To understand how it works, one has to figure out how a typical dApp works in the ecosystem. Before we get there, though, it’s important to note that DeFi applications otherwise described as DeFi tools are broadly categorized into several types, including the following;
Decentralized Exchanges (DEXs),
Composability, and so on.
As the list goes on, every dApp you’ll ever come across is built or intended for the aforementioned DeFi instruments. This also means that a dApp can be designed to offer one or more of these tools as service(s).
Now an individual dApp is built on any suitable blockchain network, including Ethereum, which is used by most dApps, Binance Smart Chain, Polkadot, Solana and many more.
While each of these blockchain networks has their special features, developers make their selection based on the complexity of the dApp protocol/project they are building. More so, every blockchain network is designed to create and deploy smart contracts for hosted dApps.
As such, with smart contact at its core, each dApp is automated and can facilitate transactions from one point to another without centralized authority.
That way, every dApp protocol ultimately processes financial transactions and stores them on the blockchain. On the other hand, transactions stored in blocks on the blockchain are then validated by other users (i.e. a network of verifying nodes also known as verifiers).
When all verifiers agree on a transaction, the block is closed and encrypted, and a new block is created with information from the previous block. That said, what is yield farming as a financial instrument in the DeFi ecosystem?