Hello, Yield farming is a broad term that encompasses many things in DEFI. However, the type that I’m interested in is found in certain dexs, such as Pancakeswap.
To my understanding, a liquidity provider receives LP tokens, for instance, let’s say I obtained some (SFP/BUSD LP tokens). If I stake these tokens on the farm, I receive some CAKE tokens. However, one may wonder where these CAKE tokens come from.
Well, PancakeSwap organizes a weekly Community Farm Auction during this auction, projects can bid to purchase the highest amount of $CAKE. The top three bidders are featured in the farm, and the CAKE they bought is burned! Meanwhile, the projects that did not make it to the top three will receive their CAKE back.
Suppose, for example, that $SFP wins the auction. In that case, it will be featured in the farm for a week, and anyone who stakes their USD/SFP LP token there will receive a portion of the newly minted CAKE (also known as CAKE emission). You can learn more about here.
In summary, the project assists in burning CAKE so that they can be featured in the farm, which allows their users to receive a portion of the new minted CAKE every day.
-this is my underestanding So correct me if I’m wrong in something
I don’t see this type of yield farming as Riba as the farmer is not lending his LPs to anyone, and LP tokens are worthless as they are just a prove of liquidity.
I’m eager to know your oppinions Mr.mufti.