liquidity pools</strong></a> that I’ve mentioned earlier!</p>\n<p><strong>Liquidity providers</strong> are people that provide their money to decentralized cryptocurrency exchanges, and receive passive returns for doing so. Let’s say that you have a $1000 laying around, and want to make it “work for you”, so to speak. Well, to start off, you would first convert that money to two cryptocurrencies - let’s say, Ethereum and AAVE.</p>\n<p>Then, you would take your ETH and AAVE, and provide it to a decentralized exchange, such as Uniswap. People would then use your <a href=https://www.bitdegree.org/"/crypto/buy-ethereum-eth/">Ethereum and AAVE in order to swap from one cryptocurrency to another. Each of these swaps have fees!</p>\n<p>Now, the <strong>fees</strong> are collected by Uniswap, and distributed to the liquidity providers as payment for their liquidity. A very simple, yet super-effective model!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is yield farming: Providing liquidity.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-yield-farming-3.o.jpg/" alt=\"What is yield farming: Providing liquidity.\" width=\"1000\" height=\"522\" /></p>\n<p>Your actual passive gains will depend on a few different factors. First of all, the amount that you provide as liquidity, and how many other liquidity providers are in the same pool. If the ETH-AAVE pool is huge, and there are thousands of others providing liquidity, you’ll probably get a smaller return!</p>\n<p>However, if you provide the pool with a hefty sum of tokens, your returns will be much bigger, as well.</p>\n<p>Another thing to look out for are the fees that the decentralized exchange imposes. Depending on these fees, your reward will vary, as well! To this day, however, Uniswap remains the most popular decentralized exchange when it comes to <strong>providing liquidity</strong> and earning passive interest.</p>\n<h2>Staking</h2>\n<p>Continuing on with the section, the third method of how you can participate in yield farming is one that’s familiar to many cryptocurrency enthusiasts - <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-staking/">staking./nAt first glance, staking can appear much the same as providing liquidity - you have some crypto coins or tokens, and provide them to a specific platform, in order to earn passive returns. I have to admit, going into the topic in-depth, things aren’t that simple - do check out the section on <a href=https://www.bitdegree.org/"/crypto/learn/what-is-staking-in-crypto/">staking, as well as the differences between <a href=https://www.bitdegree.org/"/crypto/learn/coin-vs-token/">coins and tokens</strong></a> if you’d like to learn more.</p>\n<p>For the sake of keeping this section about yield farming, though, let’s just say that staking is when you <strong>lock up your tokens</strong> in the network, in order for them to confirm other people’s transactions. Only specific coins can be staked - those that are built on the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-proof-of-stake-pos/">Proof-of-Stake consensus model!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is yield farming: Proof-of-Stake.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-yield-farming-4.o.jpg/" alt=\"What is yield farming: Proof-of-Stake.\" width=\"1000\" height=\"764\" /></p>\n<p>The simplest example of staking would be that of the Cardano project, and its native coin called ADA. You can purchase ADA on most top-rated cryptocurrency exchanges on the market, such as Binance or Coinbase. After you have your ADA coins, you would then need to find a staking pool - the simplest way to do this is to transfer your ADA into the Yoroi wallet - it’s a browser extension-based wallet, and is the most popular place where people store and keep their ADA coins. Also, Yoroi has multiple pools available to be accessed from within the <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-wallet/">wallet!
/nAll that you need to do is choose the pool that you want, and delegate <strong>your ADA coins</strong> into it. As time goes on, your coins will start earning passive returns for you!</p>\n<p>Admittedly, this is a topic that deserves a separate section, of its own.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is yield farming: Staking = providing liquidity.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-yield-farming-5.o.jpg/" alt=\"What is yield farming: Staking = providing liquidity.\" width=\"1000\" height=\"319\" /></p>\n<p>Another way how you can stake coins, and thus, farm yield, is on <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-exchange/">cryptocurrency exchanges</strong></a> themselves. Some of the most popular exchange platforms are beginning to offer their users staking functionality - you could purchase coins, and then simply stake them from within your exchange-based cryptocurrency wallet - there’s usually just one button to press, and that’s it!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is yield farming: Staking coins.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-yield-farming-6.o.jpg/" alt=\"What is yield farming: Staking coins.\" width=\"1000\" height=\"518\" /></p>\n<p>In most cases, your yield rewards will be the same tokens that you stake, or the so-called “LP tokens”, otherwise known as liquidity provider tokens. You will then be able to trade these LP tokens to another cryptocurrency, such as Ethereum.</p>\n<h2>Redistribution Fees</h2>\n<p>The last big method of how you can participate in yield farming is by holding cryptocurrencies that have <strong>redistribution fees</strong>.</p>\n<p>Sounds fancy? Well, it’s super-simple, really!</p>\n<p>Some cryptocurrencies have what are called “redistribution fees”. This means that, whenever you trade this crypto, a part of the fees that you pay for the trade will be distributed to other holders of this cryptocurrency.</p>\n<p>Probably the best-known example of this would be <strong>Safemoon</strong>. This is a very popular cryptocurrency that has redistribution fees, as well as token-<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-burning/">burning mechanics.</p>\n<p>Token burning sounds pretty fancy, but it really is simple. As you transact with a cryptocurrency, you pay certain fees for your transactions, in the form of those same tokens - so, let’s say, if you want to send 10 Safemoon to your friend, that will cost you 1 Safemoon token, as a transaction fee.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is yield farming: Safemoon example.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-yield-farming-7.o.jpg/" alt=\"What is yield farming: Safemoon example.\" width=\"1000\" height=\"958\" /></p>\n<p>Some of those fees will be redistributed to token holders - say, they would share 0,5 of a Safemoon token. The other 0,5 Safemoon would be sent to an <strong>inactive, inaccessible wallet</strong>. This is what is called “token burning” - tokens in this wallet would be lost forever. This way, the token battles inflation, and still rewards holders!</p>\n<p>Now, obviously, there are various technicalities to be aware of, when it comes to this type of yield farming. The token may sway in price heavily, and you would need to have A LOT of tokens in order to receive any notable yield gains.</p>\n<h2>Leveraged Lending</h2>\n<p>So, with the four big, main yield farming methods out of the way, I’d also like to tell you about a bonus method. It’s called “leveraged lending” - I left it as a bonus because it’s a bit trickier than the other yield farming tactics we’ve discussed in this section.</p>\n<p>Imagine that you have $100 in ETH. You decide to lend the ETH, and borrow some <strong>DOGE coins</strong>, by putting your ETH up as collateral. Since your collateral will always need to be bigger than your loan, you receive $70 worth of Dogecoin in return.</p>\n<p>Now, what you would do is go to a cryptocurrency exchange, and trade in your Dogecoins for Ethereum. You now have ETH again! So, you take it back to the lending platform, put in your new ETH coins, and borrow some more Dogecoin - and repeat the process!</p>\n<p>Since your collateral will always be higher than your loan, this does have an endpoint. However, by the end, you’ll have much more ETH in the lending platform than you did at the beginning.</p>\n<p>This isn’t a very simple process to set up, since it requires knowledge of APRs, different lending and borrowing platforms, and great timing. Also, the prices of cryptocurrencies these days are <strong>rather volatile</strong>, and you might end up liquidating your positions, if the price of ETH drops too much. However, with a bit of practice, this can be a pretty interesting yield farming strategy!</p>\n<p>So, to conclude the section, I’d like to say that, when it comes to yield farming, there are multiple methods that you could employ, with varying degrees of risk and reward. In short, though, you should focus on the <strong>top-rated projects,</strong> and cryptocurrencies that have historically shown signs of resistance against large price swings and general market volatility.</p>","meta_title":"What is Yield Farming in Crypto: Yield Farming Explained","meta_description":"Find out what is yield farming in crypto and all of the important factors such as types of yield farming that you could participate in!","meta_keywords":"what is yield farming, yield farming crypto, yield farming explained, crypto yield farming, crypto farming","order":11,"language":"en","created_at":"2022-05-03T13:25:43.000000Z","updated_at":"2023-03-10T08:17:31.000000Z","modified_content":"<p>In this section, I will tell you what is yield farming in the field of crypto!</p>\n<p><a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-yield-farming/">Yield farming</strong></a> has quickly become one of the more-popular methods of how people earn <strong>a passive income</strong> with their crypto. The concept itself is still a mystery to many, however - getting into yield farming can seem intimidating and confusing! That’s why I’ll try to strip the topic of any and all confusion, and tell you everything you need to know about yield farming.</p>\n<p>In this section, we’re analyzing yield farming. I’ll tell you what yield farming is, how it works, and how you can start farming cryptocurrency yield, as well!</p>\n<p>Let’s get to it!</p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 comparison-suggestion pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/images/compare-crypto-exchanges.gif/"/n alt=\"What is Yield Farming in Crypto? (Animated Explanation)\"\n title=\"What is Yield Farming in Crypto? (Animated Explanation)\" class=\"border-0\">\n <p>Video Explainer</p>\n </div>\n </div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: The Main Yield Farming Techniques</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"The Main Yield Farming Techniques\" video explainer</p>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"gZIux6vkz6w\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">What is Yield Farming in Crypto? (Animated Explanation)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/gZIux6vkz6w/hq720.jpg/"/n alt=\"What is Yield Farming in Crypto? (Animated Explanation)\"\n title=\"What is Yield Farming in Crypto? (Animated Explanation)\"\n class=\"p-0\">\n <img class=\"play-button\" data-target=\"#video-modal\"\n src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/video-button.png/"/n alt=\"What is Yield Farming in Crypto? (Animated Explanation)\">\n </div>\n </div>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"></i>\n </div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE</h4>\n <span>ON YOUTUBE</span>\n </div>\n </div>\n </a>\n </div>\n </div>\n </div>\n </div>\n</div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\" aria-labelledby=\"gZIux6vkz6w\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"></i>\n </button>\n <div id=\"iframe\"></div>\n </div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/crypto-subscribe.jpg/" alt=\"Subscribe\">\n </div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE</span>\n </p>\n </div>\n </div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease</h4>\n <span>New explainer videos every week!</span>\n </div>\n </div>\n </div>\n </div>\n </a>\n </div>\n </div>\n</div>\n<h2>What is Yield Farming?</h2>\n<p>So, then - what is yield farming?</p>\n<p>Well, the term consists of two words, so let’s break them down, shall we?</p>\n<p>“Yield” refers to passive rewards that you’d receive for participating in some sort of a process. The rewards are passive, since you don’t need to actively participate in said processes, all the time.</p>\n<p>In this context, “farming” simply means “<strong>continuous acquisition</strong>”. So, “yield farming” is simply a method of receiving passive profits (in the form of some asset) in a recurring manner. In principle, that’s pretty simple!</p>\n<p>When it comes to crypto, yield farming isn’t all that different. You invest some cryptocurrency into a project, and then start receiving passive periodic gains - in other words, it’s a way to make a passive income!</p>\n<p>Well, “invest” isn’t even necessarily the right term to use here, really. Rather, you would “lock” your crypto for some period of time. Allow me to illustrate with an example.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is yield farming: Yield farming in crypto.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-yield-farming-1.o.jpg/" alt=\"What is yield farming: Yield farming in crypto.\" width=\"1000\" height=\"654\" /></p>\n<p>Imagine that you have a bag of 10 candies. One day, your friend comes up to you, and makes you an offer - if you give him the bag for a week, he’ll bring you back 12 candies.</p>\n<p>Now, your friend WILL use the candies in your bag, in order to trade them with other people. However, by the end of the week, no matter what happens, you will still get 12 candies back.</p>\n<p>Do you really care that your friend will use the candies throughout the week? Does that matter at all? Not really - all that matters is that <strong>you’ll get all of your candies back</strong>, and more!</p>\n<p>This is, essentially, how yield farming works in crypto, too. Naturally, though, there are different types of yield farming that you could participate in! So, let’s check each of these types out, and try to figure out which is the most worthwhile, shall we?</p>\n<h2>Crypto Lending and Borrowing</h2>\n<p>The very first form of yield farming that you’ll likely come across is cryptocurrency lending and borrowing. This concept has become very popular throughout the last year or two!</p>\n<p>There are multiple decentralized finance projects that allow crypto fans to both borrow cryptocurrencies, as well as lend them - platforms such as <strong>AAVE,</strong> which are a great example of this.</p>\n<p>The most common way to participate in yield farming with such projects is to lend your crypto. Let’s say, you have 1 <a href=https://www.bitdegree.org/"/crypto/buy-bitcoin-btc/">Bitcoin, and aren’t planning on selling or trading it anytime soon.</p>\n<p>You would go to a platform such as AAVE, and lend that Bitcoin to someone else. Don’t worry, since the entire process is automated, and happens via special pools - there are minimal risks involved. If you’re not familiar with liquidity pools, though, I highly encourage you to read the section on the topic, in order to get a better understanding of the concept.</p>\n<p>Now, depending on a few different factors, you could expect to receive an <strong>APR (Annual Percentage Rate)</strong> of up to and over 34%. In other words, in a year, you would end up with 0,34 BTC more - that’s a huge number!</p>\n<p>To put it into context, with traditional banking institutions, your APR won’t really go over 1%. Well, you can probably see why crypto yield farming is as hot of a topic as it is!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is yield farming: Lending.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-yield-farming-2-62740da312491.o.jpg/" alt=\"What is yield farming: Lending.\" width=\"1000\" height=\"752\" /></p>\n<p>Another awesome feature of cryptocurrency lending is that, in most cases, you are able to withdraw your money at any point in time. So, if you DO end up needing that 1 Bitcoin, you can just take it out, with no strings attached.</p>\n<p>Next up, borrowing. This one’s a bit tricky, I’ll admit, since it’s one of the <strong>more-unique forms</strong> of yield farming.</p>\n<p>Imagine that you have a very old and valuable painting. You love that painting, spent a lot of time admiring it, and thus, don’t want to sell it! However, you’re in a bit of a pickle - you really need some money.</p>\n<p>What you could do is borrow money, while placing your painting as collateral for the loan. Once you pay the loan (+interest) back, you will get your painting back, too. Now, since the painting is so old and valuable, its price on the market will increase during that period of the loan.</p>\n<p>This is the general view of how yield farming works when you borrow cryptocurrencies. If you believe that Bitcoin is an awesome crypto, and it will rise in price, you could <strong>use it as collateral</strong> for your loan - then, you would have some money to work with, while also having BTC locked in as collateral, with the hopes that, once you repay your loan, that Bitcoin will be worth more than when you initially had it!</p>\n<p>Now, there is one more awesome method of how you could participate in yield farming while borrowing and lending your cryptocurrencies. However, it’s a bit more complex, so we’ll leave it for the end of the section, as a bonus - make sure to read it till the end!</p>\n<h2>Providing Liquidity</h2>\n<p>Moving on, the second big form of yield farming is becoming a liquidity provider. It sounds fancy, but the core idea behind this is very simple - in order to understand it as best as possible, however, you should really go and read the section on <a href=https://www.bitdegree.org/"/crypto/learn/what-is-liquidity-pool-in-crypto/">liquidity pools</strong></a> that I’ve mentioned earlier!</p>\n<p><strong>Liquidity providers</strong> are people that provide their money to decentralized cryptocurrency exchanges, and receive passive returns for doing so. Let’s say that you have a $1000 laying around, and want to make it “work for you”, so to speak. Well, to start off, you would first convert that money to two cryptocurrencies - let’s say, Ethereum and AAVE.</p>\n<p>Then, you would take your ETH and AAVE, and provide it to a decentralized exchange, such as Uniswap. People would then use your <a href=https://www.bitdegree.org/"/crypto/buy-ethereum-eth/">Ethereum and AAVE in order to swap from one cryptocurrency to another. Each of these swaps have fees!</p>\n<p>Now, the <strong>fees</strong> are collected by Uniswap, and distributed to the liquidity providers as payment for their liquidity. A very simple, yet super-effective model!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is yield farming: Providing liquidity.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-yield-farming-3.o.jpg/" alt=\"What is yield farming: Providing liquidity.\" width=\"1000\" height=\"522\" /></p>\n<p>Your actual passive gains will depend on a few different factors. First of all, the amount that you provide as liquidity, and how many other liquidity providers are in the same pool. If the ETH-AAVE pool is huge, and there are thousands of others providing liquidity, you’ll probably get a smaller return!</p>\n<p>However, if you provide the pool with a hefty sum of tokens, your returns will be much bigger, as well.</p>\n<p>Another thing to look out for are the fees that the decentralized exchange imposes. Depending on these fees, your reward will vary, as well! To this day, however, Uniswap remains the most popular decentralized exchange when it comes to <strong>providing liquidity</strong> and earning passive interest.</p>\n<h2>Staking</h2>\n<p>Continuing on with the section, the third method of how you can participate in yield farming is one that’s familiar to many cryptocurrency enthusiasts - <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-staking/">staking.
/nAt first glance, staking can appear much the same as providing liquidity - you have some crypto coins or tokens, and provide them to a specific platform, in order to earn passive returns. I have to admit, going into the topic in-depth, things aren’t that simple - do check out the section on <a href=https://www.bitdegree.org/"/crypto/learn/what-is-staking-in-crypto/">staking, as well as the differences between <a href=https://www.bitdegree.org/"/crypto/learn/coin-vs-token/">coins and tokens</strong></a> if you’d like to learn more.</p>\n<p>For the sake of keeping this section about yield farming, though, let’s just say that staking is when you <strong>lock up your tokens</strong> in the network, in order for them to confirm other people’s transactions. Only specific coins can be staked - those that are built on the <a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-proof-of-stake-pos/">Proof-of-Stake consensus model!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is yield farming: Proof-of-Stake.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-yield-farming-4.o.jpg/" alt=\"What is yield farming: Proof-of-Stake.\" width=\"1000\" height=\"764\" /></p>\n<p>The simplest example of staking would be that of the Cardano project, and its native coin called ADA. You can purchase ADA on most top-rated cryptocurrency exchanges on the market, such as Binance or Coinbase. After you have your ADA coins, you would then need to find a staking pool - the simplest way to do this is to transfer your ADA into the Yoroi wallet - it’s a browser extension-based wallet, and is the most popular place where people store and keep their ADA coins. Also, Yoroi has multiple pools available to be accessed from within the <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-wallet/">wallet!
/nAll that you need to do is choose the pool that you want, and delegate <strong>your ADA coins</strong> into it. As time goes on, your coins will start earning passive returns for you!</p>\n<p>Admittedly, this is a topic that deserves a separate section, of its own.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is yield farming: Staking = providing liquidity.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-yield-farming-5.o.jpg/" alt=\"What is yield farming: Staking = providing liquidity.\" width=\"1000\" height=\"319\" /></p>\n<p>Another way how you can stake coins, and thus, farm yield, is on <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/best-cryptocurrency-exchange/">cryptocurrency exchanges</strong></a> themselves. Some of the most popular exchange platforms are beginning to offer their users staking functionality - you could purchase coins, and then simply stake them from within your exchange-based cryptocurrency wallet - there’s usually just one button to press, and that’s it!</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is yield farming: Staking coins.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-yield-farming-6.o.jpg/" alt=\"What is yield farming: Staking coins.\" width=\"1000\" height=\"518\" /></p>\n<p>In most cases, your yield rewards will be the same tokens that you stake, or the so-called “LP tokens”, otherwise known as liquidity provider tokens. You will then be able to trade these LP tokens to another cryptocurrency, such as Ethereum.</p>\n<h2>Redistribution Fees</h2>\n<p>The last big method of how you can participate in yield farming is by holding cryptocurrencies that have <strong>redistribution fees</strong>.</p>\n<p>Sounds fancy? Well, it’s super-simple, really!</p>\n<p>Some cryptocurrencies have what are called “redistribution fees”. This means that, whenever you trade this crypto, a part of the fees that you pay for the trade will be distributed to other holders of this cryptocurrency.</p>\n<p>Probably the best-known example of this would be <strong>Safemoon</strong>. This is a very popular cryptocurrency that has redistribution fees, as well as token-<a href=https://www.bitdegree.org/"/crypto/learn/crypto-terms/what-is-burning/">burning mechanics.</p>\n<p>Token burning sounds pretty fancy, but it really is simple. As you transact with a cryptocurrency, you pay certain fees for your transactions, in the form of those same tokens - so, let’s say, if you want to send 10 Safemoon to your friend, that will cost you 1 Safemoon token, as a transaction fee.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is yield farming: Safemoon example.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/media/what-is-yield-farming-7.o.jpg/" alt=\"What is yield farming: Safemoon example.\" width=\"1000\" height=\"958\" /></p>\n<p>Some of those fees will be redistributed to token holders - say, they would share 0,5 of a Safemoon token. The other 0,5 Safemoon would be sent to an <strong>inactive, inaccessible wallet</strong>. This is what is called “token burning” - tokens in this wallet would be lost forever. This way, the token battles inflation, and still rewards holders!</p>\n<p>Now, obviously, there are various technicalities to be aware of, when it comes to this type of yield farming. The token may sway in price heavily, and you would need to have A LOT of tokens in order to receive any notable yield gains.</p>\n<h2>Leveraged Lending</h2>\n<p>So, with the four big, main yield farming methods out of the way, I’d also like to tell you about a bonus method. It’s called “leveraged lending” - I left it as a bonus because it’s a bit trickier than the other yield farming tactics we’ve discussed in this section.</p>\n<p>Imagine that you have $100 in ETH. You decide to lend the ETH, and borrow some <strong>DOGE coins</strong>, by putting your ETH up as collateral. Since your collateral will always need to be bigger than your loan, you receive $70 worth of Dogecoin in return.</p>\n<p>Now, what you would do is go to a cryptocurrency exchange, and trade in your Dogecoins for Ethereum. You now have ETH again! So, you take it back to the lending platform, put in your new ETH coins, and borrow some more Dogecoin - and repeat the process!</p>\n<p>Since your collateral will always be higher than your loan, this does have an endpoint. However, by the end, you’ll have much more ETH in the lending platform than you did at the beginning.</p>\n<p>This isn’t a very simple process to set up, since it requires knowledge of APRs, different lending and borrowing platforms, and great timing. Also, the prices of cryptocurrencies these days are <strong>rather volatile</strong>, and you might end up liquidating your positions, if the price of ETH drops too much. However, with a bit of practice, this can be a pretty interesting yield farming strategy!</p>\n<p>So, to conclude the section, I’d like to say that, when it comes to yield farming, there are multiple methods that you could employ, with varying degrees of risk and reward. In short, though, you should focus on the <strong>top-rated projects,</strong> and cryptocurrencies that have historically shown signs of resistance against large price swings and general market volatility.</p>","preview_url":"https://www.bitdegree.org/crypto/learn/what-is-yield-farming-in-crypto","youtube_video":{"id":17,"channel_id":1,"sort":45,"video_title":"What is Yield Farming in Crypto? (Animated Explanation)","description":"What is yield farming in crypto?\n\nYield farming allows you to use cryptocurrencies in order to earn a passive income over a period of time, without selling or trading your actual cryptos. \n\nThere are multiple methods of how you can participate in yield farming, all coming with varying degrees of risk and reward. In this video, I will tell you about the main methods, and explain how you can start farming crypto yield today!\n\nHave you ever participated in cryptocurrency yield farming activities? Share your experiences in the comment section below!\n\nVideo Time Table:\n\n0:00 Introduction to What is Yield Farming in Crypto\n0:41 What is Yield Farming?\n2:09 Crypto Lending & Borrowing\n4:30 Providing Liquidity\n5:57 Staking\n7:54 Redistribution Fees\n9:11 Leveraged Lending\n10:15 Wrap-up: What is Yield Farming in Crypto?\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#WhatisYieldFarming #YieldFarmingCrypto #CryptoYieldFarming #YieldFarmingExplained #CryptoFarming","video_id":"gZIux6vkz6w","duration":643,"view_count":757,"thumbnail_url":"https://i.ytimg.com/vi/gZIux6vkz6w/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2022-03-22 16:17:03","created_at":"2022-03-22T23:00:02.000000Z","updated_at":"2023-05-21T23:00:04.000000Z","channel":{"id":1,"title":"CryptoFinallyExplained","channel_id":"UCOryUY0yxC08eJtK23mNgiA","main_playlist_id":"UUOryUY0yxC08eJtK23mNgiA"}}},"chapterTitle":"dApps & Defi","cryptoBookSection":{"id":429,"featured_image_id":10249,"original_id":null,"youtube_video_id":144,"author_id":42,"translator_id":null,"chapter_id":6,"title":"Crypto Oracles: The Link Between Blockchain and Outside World Data","slug":"what-is-an-oracle-in-crypto","definition":"Did you know that oracles serve as the equivalent of messengers in the world of cryptocurrencies?","status":"published","content":"<p>In this section, we’re going to answer the questions of what is an oracle in crypto, and how important are they in the DeFi ecosystem!</p>\n<p>At first glance, oracles in crypto can seem a sophisticated, and therefore, intimidating topic. In previous sections, I covered a bunch of blockchain-related subjects such as <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-are-smart-contracts/">smart contracts</strong></a>, <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-is-defi/">DeFi, and <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-is-blockchain/">blockchains themselves. <strong>Crypto oracles are where all of them interlink</strong>.</p>\n<p>You see, the world of blockchain tech relies on one, crucial aspect - information. Just like oracles were the ones who revealed seemingly unattainable information back in the old days, the modern-day crypto oracles do the very same - <strong>they keep things running by providing the latest data</strong>.</p>\n<p>In this section, we’re going to take a deep dive into the concept and practical application of crypto oracles. I’ll give you a brief introduction of what they are, then I’ll look into how they are applied in practice, and, finally, what are their drawbacks. In the end, you’ll be well aware of what they do, what makes the best crypto oracles, and how they keep the bricks of the DeFi house together!</p>\n<p><em>Without further ado, let’s get to it!</em></p>\n<h2>What is an Oracle in Crypto?</h2>\n<p>Let’s start from the very beginning - what is an oracle in crypto?</p>\n<p>The technical definition sounds something like this: <strong>“Oracles are entities that provide real-world data, or information, to smart contracts on blockchain networks”.</strong> Okay, that doesn’t sound too complex. Why do we need them, though?</p>\n<p>Oracles serve as a <strong>bridge between the blockchain and the outside world</strong>, allowing smart contracts to interact with external data sources in a decentralized (and secure!) manner. It’s thanks to them that smart contracts are able to be activated and execute actions based on verified, up-to-date, and reliable information. Best crypto oracles allow DeFi apps to run flawlessly, without the intervention and supervision of a third, centralized party.</p>\n<p>Okay, suddenly, things got a bit more intricate. Let's take a look at it another way. <strong>Imagine a pawn shop. </strong>Someone brings in a gold watch that they want to sell. Now, to avoid being scammed, the pawn shop owner needs to be aware of how to recognize real and fake gold. Then, in order to accurately evaluate its price, the owner needs to be aware of the current price of gold, and how much particular gold watches go for. Based on their knowledge and experience, the pawn shop owner immediately scans the situation, and can come up with a fair offer.</p>\n<p>Now, imagine if the pawn shop owner was on sick leave, and they had a random guy run the shop as a substitute. The substitute worker would have no clue about how to evaluate the gold watch. He would have to either Google things, or call the owner to consult with him. His decision would depend on an external source of information. You could say that… The substitute worker would need an oracle to accurately evaluate the deal.</p>\n<p><strong>Let’s turn this imaginary pawn shop into a DeFi application that runs automatically, thanks to smart contracts.</strong></p>\n<p>Smart contracts get activated when certain, predefined conditions are met. For example: <em>“if a user pays X amount of coins, the user receives Y amount of different tokens”</em>. If the amount is less than the required X, the smart contract is not activated; therefore, the user cannot receive anything.</p>\n<p>But, in order for smart contracts to run smoothly, they need a constant reminder about the state of the ongoing deal, about the value of particular coins or other assets, or the simple fact that the user is solvent, and actually has the required amount of coins or tokens in their wallet. All of these variables substitute one word: <strong>information</strong>.</p>\n<p>That’s where the crypto oracles come in. They verify all of this, and make sure that there’s no fishy business going on. And then, after all of this info gets verified, they trigger the payment, as the smart contract gets activated.</p>\n<h2>Different Types of Oracles in Crypto</h2>\n<p>By now, we have found out that the answer to the “what is an oracle in crypto?” question is that <strong>they function as a source of external, real-life information that smart contracts depend upon</strong>.</p>\n<p>It would be easy to simply find a list with all the best crypto oracles named in it. But they differ in many ways, as there are several types of oracles in crypto. What are they?</p>\n<p>Well, there are two main kinds, actually - <strong>software and hardware oracles.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is an oracle in crypto: Software oracles.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-an-oracle-in-crypto-01.jpg/" alt=\"What is an oracle in crypto: Software oracles.\" width=\"1000\" height=\"743\" /></strong></p>\n<p><strong>A software oracle</strong> is what it sounds like. An oracle in the form of a specifically designed program to run as the bridge between the blockchain and off-chain data sources. These sources can be web-based databases, and they’re used for consistent tracking of a particular variable, such as the price of an asset, real-life events, or simply web services and their prices.</p>\n<p>To tell it in layman’s terms, just like librarians help readers find a specific book within a large library, software oracles help smart contracts find the necessary information to validate and begin executing it themselves.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is an oracle in crypto: Hardware oracles.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-an-oracle-in-crypto-02.jpg/" alt=\"What is an oracle in crypto: Hardware oracles.\" width=\"1000\" height=\"578\" /></p>\n<p>Moving on to <strong>hardware oracles</strong>. Once again, it’s all in the name. Unlike software oracles, hardware oracles aren’t simply computer programs. They are hardware devices. They operate in physically isolated environments, therefore, they are less accessible to hackers, or other actors guided by malicious intents. This aspect makes hardware oracles stronger and more resilient in terms of security. Their purpose remains the same - to securely transfer data into a blockchain.</p>\n<p>So, to sum up, the key difference between hardware and software oracles is <strong>the level of security they provide to a blockchain</strong>.</p>\n<h2><span style=\"font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Open Sans', 'Helvetica Neue', sans-serif;\">Practical Use Cases of Oracles</span></h2>\n<p><span style=\"font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Open Sans', 'Helvetica Neue', sans-serif;\">Furthermore, let’s concentrate on something practical - <strong>let’s move on from the question “what is an oracle in crypto?”, and talk about what they do</strong>. Specifically, what are the practical use cases of crypto oracles? Let’s zoom in on a specific example - <strong>Chainlink</strong>, the decentralized blockchain oracle network. As of writing, it’s the most popular oracle in the entirety of DeFi. It’s also the perfect example of a software oracle.</span></p>\n<p>Here’s what it does. Whenever traders engage in buying, selling, or trading coins and tokens, in order for trades to be executed, the smart contract needs to be updated with the latest information about the actual value of a particular coin. For example, whenever a trader is about to make a swap from <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-ethereum-eth/">ETH to the <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-usd-coin-usdc/">USDC stablecoin on a DEX, a decentralized exchange, the oracle is the mechanism behind precise and reliable price evaluations.</p>\n<p>Besides, if you feel like your knowledge about <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-are-stablecoins/">stablecoins or <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/dex-vs-cex/">DEXs needs updating, be sure to check dedicated sections to these topics covered in this Crypto 101 Handbook! Now, let’s cement it: <strong>oracles in crypto are the tools that keep the network fresh and up-to-date with constant updates about how much a particular coin is valued every moment</strong>.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is an oracle in crypto: Supply chain management.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-an-oracle-in-crypto-03.jpg/" alt=\"What is an oracle in crypto: Supply chain management.\" width=\"1000\" height=\"644\" /></p>\n<p>Furthermore, another crypto oracle use case is <strong>supply chain management</strong>. Think of an oracle as a GPS device. Just like it tracks the movement of a person, or a car, or a shipment, so does an oracle track the status of transactions of data, be it money, staking, swaps, or whatever, on the blockchain. Whenever a significant change takes place, the oracle gets updated, and sends out the signal to the blockchain.</p>\n<p>In addition to these use cases, one more interesting example could be added: <strong>gaming</strong>. Think of it this way – as gamers continue playing games and climbing up the leaderboard, an oracle tracks the results and updates smart contracts on the blockchain with the latest achievements, progress, and stats.</p>\n<h2>Challenges and Risks</h2>\n<p>Now, no one’s perfect in this world. Oracles aren’t an exception, and even if you made a “best crypto oracles” list, you’d still find drawbacks with almost every one of them.</p>\n<p><strong>The main challenge that arises from using oracles is ensuring that the data they bring in is accurate and reliable</strong>. Instead of tampering with the oracles, attackers can manipulate the sources that oracles gather their data from. If the primary information point is compromised, the oracle will automatically transfer altered data to the blockchain.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is an oracle in crypto: \" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-an-oracle-in-crypto-04.jpg/" alt=\"What is an oracle in crypto: \" width=\"1000\" height=\"676\" /></p>\n<p>Whenever an oracle relies on a single source of data, the risk gets high. This is where the term a <strong>Single Point of Failure (SPOF)</strong> comes in. It happens when there is a single point or entity that controls the oracle, and it gets compromised, thus hurting the trustless and decentralized nature of the blockchain.</p>\n<p>A real-life SPOF example occurs when a power grid goes down because of a failure in a single power station. Just like a power grid, a blockchain network needs multiple sources of data to function properly. An SPOF oracle would mean that the network relied on a single point of informational input that got affected.</p>\n<h2>Wrapping Up</h2>\n<p>To conclude, oracles are like messengers of the crypto world, bridging the gap between the decentralized blockchain network and the traditional world of data and information. <strong>They enable smart contracts to access and use data from the outside world, making them a crucial component of the crypto ecosystem.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is an oracle in crypto: Conclusion.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-an-oracle-in-crypto-05.jpg/" alt=\"What is an oracle in crypto: Conclusion.\" width=\"1000\" height=\"654\" /></strong></p>\n<p>From DeFi to supply chain management and gaming, oracles have a wide range of use cases that are revolutionizing the way we interact with data in a fast, reliable, and decentralized manner.</p>\n<p>However, with great power comes great responsibility. It's important to keep in mind the <strong>challenges and risks associated with oracles</strong>, and to implement measures to mitigate them. These challenges mainly consist of ensuring the accuracy and reliability of the data, avoiding the “Single Point of Failure” issue, and setting up enough barriers and protection from malicious manipulation.</p>\n<p>So, whether you're a crypto enthusiast, a blockchain developer, or simply someone who's curious about the future of technology, being able to answer the question of “what is an oracle in crypto?” is essential.</p>","meta_title":"What is an Oracle in Crypto?","meta_description":"Wondering what is an oracle in crypto? You're in luck because you'll find everything about oracles, including the best crypto oracles here!","meta_keywords":"what is an oracle in crypto, crypto oracle list, best crypto oracles","order":12,"language":"en","created_at":"2023-02-27T14:49:16.000000Z","updated_at":"2023-04-03T14:11:57.000000Z","modified_content":"<p>In this section, we’re going to answer the questions of what is an oracle in crypto, and how important are they in the DeFi ecosystem!</p>\n<p>At first glance, oracles in crypto can seem a sophisticated, and therefore, intimidating topic. In previous sections, I covered a bunch of blockchain-related subjects such as <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-are-smart-contracts/">smart contracts</strong></a>, <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-is-defi/">DeFi, and <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-is-blockchain/">blockchains themselves. <strong>Crypto oracles are where all of them interlink</strong>.</p>\n<p>You see, the world of blockchain tech relies on one, crucial aspect - information. Just like oracles were the ones who revealed seemingly unattainable information back in the old days, the modern-day crypto oracles do the very same - <strong>they keep things running by providing the latest data</strong>.</p>\n<p>In this section, we’re going to take a deep dive into the concept and practical application of crypto oracles. I’ll give you a brief introduction of what they are, then I’ll look into how they are applied in practice, and, finally, what are their drawbacks. In the end, you’ll be well aware of what they do, what makes the best crypto oracles, and how they keep the bricks of the DeFi house together!</p>\n<p><em>Without further ado, let’s get to it!</em></p>\n<div class=\"container\">\n <div class=\"row justify-content-center\">\n <div class=\"col-md-10 comparison-suggestion pb-3 mb-4\">\n <div class=\"d-flex flex-row\">\n <div class=\"text-center\">\n <div class=\"img-block-yt\">\n <img src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/images/compare-crypto-exchanges.gif/"/n alt=\"What Are Oracles in Crypto? (Beginner Friendly Animation)\"\n title=\"What Are Oracles in Crypto? (Beginner Friendly Animation)\" class=\"border-0\">\n <p>Video Explainer</p>\n </div>\n </div>\n <div class=\"col-xs-10 col-sm-10 col-md-10 text-left py-3 yt-info\">\n <h4 class=\"mb-1\">Video Explainer: Crypto Oracles: The Link Between Blockchain and Outside World Data</h4>\n <p class=\"py-1 mb-0 youtube-video-subtitle\">Reading is not your thing? Watch the \"Crypto Oracles: The Link Between Blockchain and Outside World Data\" video explainer</p>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div class=\"col-12 col-md-11 px-3\">\n <div class=\"wrapper mb-0\">\n <div class=\"youtube mb-4 bg-transparent p-0 video-modal-popup\" data-toggle=\"modal\"\n data-target=\"#video-modal\" data-id=\"1s6Qc7qexBo\" data-title=\"CryptoFinallyExplained\">\n <div class=\"video-gradient-top\"></div>\n <p class=\"text-left dyk-video-title\">What Are Oracles in Crypto? (Beginner Friendly Animation)</p>\n <img src=https://www.bitdegree.org/"https://i.ytimg.com/vi/1s6Qc7qexBo/hq720.jpg/"/n alt=\"What Are Oracles in Crypto? (Beginner Friendly Animation)\"\n title=\"What Are Oracles in Crypto? (Beginner Friendly Animation)\"\n class=\"p-0\">\n <img class=\"play-button\" data-target=\"#video-modal\"\n src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/video-button.png/"/n alt=\"What Are Oracles in Crypto? (Beginner Friendly Animation)\">\n </div>\n </div>\n </div>\n </div>\n <div class=\"row justify-content-center text-center\">\n <div>\n <a href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n class=\"btn yt-promo mb-2\" target=\"_blank\" rel=\"nofollow noopener\">\n <div class=\"row justify-content-center align-items-center mx-0 text-center\">\n <div class=\"col-4 col-md-4\">\n <i class=\"fab fa-youtube yt-dyk-btn\"></i>\n </div>\n <div class=\"col-8 col-md-8 text-center yt-promo-text\">\n <h4 class=\"m-0 text-white\">SUBSCRIBE</h4>\n <span>ON YOUTUBE</span>\n </div>\n </div>\n </a>\n </div>\n </div>\n </div>\n </div>\n</div>\n<div class=\"modal fade\" id=\"video-modal\" tabindex=\"-1\" role=\"dialog\" aria-labelledby=\"1s6Qc7qexBo\">\n <div class=\"modal-dialog modal-dialog-centered modal-lg\" role=\"document\">\n <div class=\"modal-content\">\n <div class=\"modal-body p-0\">\n <button type=\"button\" class=\"video-modal-close close\" data-dismiss=\"modal\" aria-label=\"Close\">\n <i aria-hidden=\"true\" class=\"fas fa-times\"></i>\n </button>\n <div id=\"iframe\"></div>\n </div>\n <a class=\"text-decoration-none\"\n href=https://www.bitdegree.org/"https://www.youtube.com/c/CryptoFinallyExplained?sub_confirmation=1\%22\n rel=\"nofollow noopener\" target=\"_blank\">\n <div class=\"modal-footer p-0 d-block bg-white\">\n <div class=\"row justify-content-center m-0\">\n <div class=\"col-3 col-md-4 col-lg-2 p-0\">\n <img class=\"w-100 h-100\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/assets/crypto-subscribe.jpg/" alt=\"Subscribe\">\n </div>\n <div class=\"col-9 col-md-8 col-lg-2 px-0 d-flex\">\n <div class=\"modal-subscribe w-100\">\n <p class=\"m-0 mt-1 mr-3\">SUBSCRIBE<br>\n <span class=\"m-0\">ON YOUTUBE</span>\n </p>\n </div>\n </div>\n <div class=\"col-12 col-md-12 col-lg-8 p-0 text-center d-flex justify-content-center align-items-center\">\n <div class=\"modal-subscribe-text\">\n <h4 class=\"m-0\">Understand crypto with ease</h4>\n <span>New explainer videos every week!</span>\n </div>\n </div>\n </div>\n </div>\n </a>\n </div>\n </div>\n</div>\n<h2>What is an Oracle in Crypto?</h2>\n<p>Let’s start from the very beginning - what is an oracle in crypto?</p>\n<p>The technical definition sounds something like this: <strong>“Oracles are entities that provide real-world data, or information, to smart contracts on blockchain networks”.</strong> Okay, that doesn’t sound too complex. Why do we need them, though?</p>\n<p>Oracles serve as a <strong>bridge between the blockchain and the outside world</strong>, allowing smart contracts to interact with external data sources in a decentralized (and secure!) manner. It’s thanks to them that smart contracts are able to be activated and execute actions based on verified, up-to-date, and reliable information. Best crypto oracles allow DeFi apps to run flawlessly, without the intervention and supervision of a third, centralized party.</p>\n<p>Okay, suddenly, things got a bit more intricate. Let's take a look at it another way. <strong>Imagine a pawn shop. </strong>Someone brings in a gold watch that they want to sell. Now, to avoid being scammed, the pawn shop owner needs to be aware of how to recognize real and fake gold. Then, in order to accurately evaluate its price, the owner needs to be aware of the current price of gold, and how much particular gold watches go for. Based on their knowledge and experience, the pawn shop owner immediately scans the situation, and can come up with a fair offer.</p>\n<p>Now, imagine if the pawn shop owner was on sick leave, and they had a random guy run the shop as a substitute. The substitute worker would have no clue about how to evaluate the gold watch. He would have to either Google things, or call the owner to consult with him. His decision would depend on an external source of information. You could say that… The substitute worker would need an oracle to accurately evaluate the deal.</p>\n<p><strong>Let’s turn this imaginary pawn shop into a DeFi application that runs automatically, thanks to smart contracts.</strong></p>\n<p>Smart contracts get activated when certain, predefined conditions are met. For example: <em>“if a user pays X amount of coins, the user receives Y amount of different tokens”</em>. If the amount is less than the required X, the smart contract is not activated; therefore, the user cannot receive anything.</p>\n<p>But, in order for smart contracts to run smoothly, they need a constant reminder about the state of the ongoing deal, about the value of particular coins or other assets, or the simple fact that the user is solvent, and actually has the required amount of coins or tokens in their wallet. All of these variables substitute one word: <strong>information</strong>.</p>\n<p>That’s where the crypto oracles come in. They verify all of this, and make sure that there’s no fishy business going on. And then, after all of this info gets verified, they trigger the payment, as the smart contract gets activated.</p>\n<h2>Different Types of Oracles in Crypto</h2>\n<p>By now, we have found out that the answer to the “what is an oracle in crypto?” question is that <strong>they function as a source of external, real-life information that smart contracts depend upon</strong>.</p>\n<p>It would be easy to simply find a list with all the best crypto oracles named in it. But they differ in many ways, as there are several types of oracles in crypto. What are they?</p>\n<p>Well, there are two main kinds, actually - <strong>software and hardware oracles.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is an oracle in crypto: Software oracles.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-an-oracle-in-crypto-01.jpg/" alt=\"What is an oracle in crypto: Software oracles.\" width=\"1000\" height=\"743\" /></strong></p>\n<p><strong>A software oracle</strong> is what it sounds like. An oracle in the form of a specifically designed program to run as the bridge between the blockchain and off-chain data sources. These sources can be web-based databases, and they’re used for consistent tracking of a particular variable, such as the price of an asset, real-life events, or simply web services and their prices.</p>\n<p>To tell it in layman’s terms, just like librarians help readers find a specific book within a large library, software oracles help smart contracts find the necessary information to validate and begin executing it themselves.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is an oracle in crypto: Hardware oracles.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-an-oracle-in-crypto-02.jpg/" alt=\"What is an oracle in crypto: Hardware oracles.\" width=\"1000\" height=\"578\" /></p>\n<p>Moving on to <strong>hardware oracles</strong>. Once again, it’s all in the name. Unlike software oracles, hardware oracles aren’t simply computer programs. They are hardware devices. They operate in physically isolated environments, therefore, they are less accessible to hackers, or other actors guided by malicious intents. This aspect makes hardware oracles stronger and more resilient in terms of security. Their purpose remains the same - to securely transfer data into a blockchain.</p>\n<p>So, to sum up, the key difference between hardware and software oracles is <strong>the level of security they provide to a blockchain</strong>.</p>\n<h2><span style=\"font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Open Sans', 'Helvetica Neue', sans-serif;\">Practical Use Cases of Oracles</span></h2>\n<p><span style=\"font-family: -apple-system, BlinkMacSystemFont, 'Segoe UI', Roboto, Oxygen, Ubuntu, Cantarell, 'Open Sans', 'Helvetica Neue', sans-serif;\">Furthermore, let’s concentrate on something practical - <strong>let’s move on from the question “what is an oracle in crypto?”, and talk about what they do</strong>. Specifically, what are the practical use cases of crypto oracles? Let’s zoom in on a specific example - <strong>Chainlink</strong>, the decentralized blockchain oracle network. As of writing, it’s the most popular oracle in the entirety of DeFi. It’s also the perfect example of a software oracle.</span></p>\n<p>Here’s what it does. Whenever traders engage in buying, selling, or trading coins and tokens, in order for trades to be executed, the smart contract needs to be updated with the latest information about the actual value of a particular coin. For example, whenever a trader is about to make a swap from <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-ethereum-eth/">ETH to the <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/buy-usd-coin-usdc/">USDC stablecoin on a DEX, a decentralized exchange, the oracle is the mechanism behind precise and reliable price evaluations.</p>\n<p>Besides, if you feel like your knowledge about <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/what-are-stablecoins/">stablecoins or <a href=https://www.bitdegree.org/"https://www.bitdegree.org/crypto/learn/dex-vs-cex/">DEXs needs updating, be sure to check dedicated sections to these topics covered in this Crypto 101 Handbook! Now, let’s cement it: <strong>oracles in crypto are the tools that keep the network fresh and up-to-date with constant updates about how much a particular coin is valued every moment</strong>.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is an oracle in crypto: Supply chain management.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-an-oracle-in-crypto-03.jpg/" alt=\"What is an oracle in crypto: Supply chain management.\" width=\"1000\" height=\"644\" /></p>\n<p>Furthermore, another crypto oracle use case is <strong>supply chain management</strong>. Think of an oracle as a GPS device. Just like it tracks the movement of a person, or a car, or a shipment, so does an oracle track the status of transactions of data, be it money, staking, swaps, or whatever, on the blockchain. Whenever a significant change takes place, the oracle gets updated, and sends out the signal to the blockchain.</p>\n<p>In addition to these use cases, one more interesting example could be added: <strong>gaming</strong>. Think of it this way – as gamers continue playing games and climbing up the leaderboard, an oracle tracks the results and updates smart contracts on the blockchain with the latest achievements, progress, and stats.</p>\n<h2>Challenges and Risks</h2>\n<p>Now, no one’s perfect in this world. Oracles aren’t an exception, and even if you made a “best crypto oracles” list, you’d still find drawbacks with almost every one of them.</p>\n<p><strong>The main challenge that arises from using oracles is ensuring that the data they bring in is accurate and reliable</strong>. Instead of tampering with the oracles, attackers can manipulate the sources that oracles gather their data from. If the primary information point is compromised, the oracle will automatically transfer altered data to the blockchain.</p>\n<p><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is an oracle in crypto: \" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-an-oracle-in-crypto-04.jpg/" alt=\"What is an oracle in crypto: \" width=\"1000\" height=\"676\" /></p>\n<p>Whenever an oracle relies on a single source of data, the risk gets high. This is where the term a <strong>Single Point of Failure (SPOF)</strong> comes in. It happens when there is a single point or entity that controls the oracle, and it gets compromised, thus hurting the trustless and decentralized nature of the blockchain.</p>\n<p>A real-life SPOF example occurs when a power grid goes down because of a failure in a single power station. Just like a power grid, a blockchain network needs multiple sources of data to function properly. An SPOF oracle would mean that the network relied on a single point of informational input that got affected.</p>\n<h2>Wrapping Up</h2>\n<p>To conclude, oracles are like messengers of the crypto world, bridging the gap between the decentralized blockchain network and the traditional world of data and information. <strong>They enable smart contracts to access and use data from the outside world, making them a crucial component of the crypto ecosystem.</strong></p>\n<p><strong><img style=\"display: block; margin-left: auto; margin-right: auto;\" title=\"What is an oracle in crypto: Conclusion.\" src=https://www.bitdegree.org/"https://assets.bitdegree.org/crypto/storage/optimized/what-is-an-oracle-in-crypto-05.jpg/" alt=\"What is an oracle in crypto: Conclusion.\" width=\"1000\" height=\"654\" /></strong></p>\n<p>From DeFi to supply chain management and gaming, oracles have a wide range of use cases that are revolutionizing the way we interact with data in a fast, reliable, and decentralized manner.</p>\n<p>However, with great power comes great responsibility. It's important to keep in mind the <strong>challenges and risks associated with oracles</strong>, and to implement measures to mitigate them. These challenges mainly consist of ensuring the accuracy and reliability of the data, avoiding the “Single Point of Failure” issue, and setting up enough barriers and protection from malicious manipulation.</p>\n<p>So, whether you're a crypto enthusiast, a blockchain developer, or simply someone who's curious about the future of technology, being able to answer the question of “what is an oracle in crypto?” is essential.</p>","preview_url":"https://www.bitdegree.org/crypto/learn/what-is-an-oracle-in-crypto","youtube_video":{"id":144,"channel_id":1,"sort":8,"video_title":"What Are Oracles in Crypto? (Beginner Friendly Animation)","description":"What are cryptocurrency oracles?\n\nThe best crypto oracles are where blockchains, smart contracts, and cryptocurrencies connect. It’s an essential element of the DeFi ecosystem. If you’re not familiar with crypto oracles, it’s crucial to change that!\n\nIn this video, I will explain what is a crypto oracle, and what role they play in the DeFi space! We’ll talk about their differences, what are their practical applications, and what’s their weakest point. After watching this video, crypto oracles will no longer be a mystery for you.\n\nDo you think oracles are an important part of crypto? Make sure to share your insights in the comments below the video!\n\nVideo Time Table:\n0:00 Introduction to What Are Oracles in Crypto\n1:13 What are Cryptocurrency Oracles?\n3:41 Different Types of Oracles in Crypto\n5:10 Crypto Oracle Use Cases\n6:51 Challenges & Risks\n7:54 Wrap-up: What Are Oracles in Crypto?\n\nGet Quick Crypto Tips on Twitter - Follow:\nhttps://twitter.com/crypto_xplained\n\n#WhatAreOraclesinCrypto #Chainlink #OracleNetworks","video_id":"1s6Qc7qexBo","duration":550,"view_count":165,"thumbnail_url":"https://i.ytimg.com/vi/1s6Qc7qexBo/hq720.jpg","thumbnail_width":1280,"thumbnail_height":720,"published_at":"2023-03-30 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Terms","updated":false,"chapter":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters/crypto-101-glossary.jpg","chapter_simple":"https://assets.bitdegree.org/crypto/assets/crypto-book/chapters-simple/crypto-glossary-101.jpg","rating":100,"sections":["A","B","C","D","E","F","G","H","I","J","K","L","M","N","O","P","Q","R","S","T","U","V","W","X","Y","Z"]}],"currentChapter":"dapps-and-defi","currentSection":"what-is-an-oracle-in-crypto","readingTime":8,"readingLevel":"medium"},"url":"/crypto/learn/what-is-an-oracle-in-crypto","version":"cdd198d50cbe5c9c21c9329d7c096ffc"}" class="container-fluid d-flex crypto-book p-0"> Chapter 6: dApps & Defi
Crypto Oracles: The Link Between Blockchain and Outside World Data
Did you know that oracles serve as the equivalent of messengers in the world of cryptocurrencies?
In this section, we’re going to answer the questions of what is an oracle in crypto, and how important are they in the DeFi ecosystem!
At first glance, oracles in crypto can seem a sophisticated, and therefore, intimidating topic. In previous sections, I covered a bunch of blockchain-related subjects such as smart contracts, DeFi, and blockchains themselves. Crypto oracles are where all of them interlink.
You see, the world of blockchain tech relies on one, crucial aspect - information. Just like oracles were the ones who revealed seemingly unattainable information back in the old days, the modern-day crypto oracles do the very same - they keep things running by providing the latest data.
In this section, we’re going to take a deep dive into the concept and practical application of crypto oracles. I’ll give you a brief introduction of what they are, then I’ll look into how they are applied in practice, and, finally, what are their drawbacks. In the end, you’ll be well aware of what they do, what makes the best crypto oracles, and how they keep the bricks of the DeFi house together!
Without further ado, let’s get to it!
Video Explainer
Video Explainer: Crypto Oracles: The Link Between Blockchain and Outside World Data
Reading is not your thing? Watch the "Crypto Oracles: The Link Between Blockchain and Outside World Data" video explainer
What is an Oracle in Crypto?
Let’s start from the very beginning - what is an oracle in crypto?
The technical definition sounds something like this: “Oracles are entities that provide real-world data, or information, to smart contracts on blockchain networks”. Okay, that doesn’t sound too complex. Why do we need them, though?
Oracles serve as a bridge between the blockchain and the outside world, allowing smart contracts to interact with external data sources in a decentralized (and secure!) manner. It’s thanks to them that smart contracts are able to be activated and execute actions based on verified, up-to-date, and reliable information. Best crypto oracles allow DeFi apps to run flawlessly, without the intervention and supervision of a third, centralized party.
Okay, suddenly, things got a bit more intricate. Let's take a look at it another way. Imagine a pawn shop. Someone brings in a gold watch that they want to sell. Now, to avoid being scammed, the pawn shop owner needs to be aware of how to recognize real and fake gold. Then, in order to accurately evaluate its price, the owner needs to be aware of the current price of gold, and how much particular gold watches go for. Based on their knowledge and experience, the pawn shop owner immediately scans the situation, and can come up with a fair offer.
Now, imagine if the pawn shop owner was on sick leave, and they had a random guy run the shop as a substitute. The substitute worker would have no clue about how to evaluate the gold watch. He would have to either Google things, or call the owner to consult with him. His decision would depend on an external source of information. You could say that… The substitute worker would need an oracle to accurately evaluate the deal.
Let’s turn this imaginary pawn shop into a DeFi application that runs automatically, thanks to smart contracts.
Smart contracts get activated when certain, predefined conditions are met. For example: “if a user pays X amount of coins, the user receives Y amount of different tokens”. If the amount is less than the required X, the smart contract is not activated; therefore, the user cannot receive anything.
But, in order for smart contracts to run smoothly, they need a constant reminder about the state of the ongoing deal, about the value of particular coins or other assets, or the simple fact that the user is solvent, and actually has the required amount of coins or tokens in their wallet. All of these variables substitute one word: information.
That’s where the crypto oracles come in. They verify all of this, and make sure that there’s no fishy business going on. And then, after all of this info gets verified, they trigger the payment, as the smart contract gets activated.
Different Types of Oracles in Crypto
By now, we have found out that the answer to the “what is an oracle in crypto?” question is that they function as a source of external, real-life information that smart contracts depend upon.
It would be easy to simply find a list with all the best crypto oracles named in it. But they differ in many ways, as there are several types of oracles in crypto. What are they?
Well, there are two main kinds, actually - software and hardware oracles.
A software oracle is what it sounds like. An oracle in the form of a specifically designed program to run as the bridge between the blockchain and off-chain data sources. These sources can be web-based databases, and they’re used for consistent tracking of a particular variable, such as the price of an asset, real-life events, or simply web services and their prices.
To tell it in layman’s terms, just like librarians help readers find a specific book within a large library, software oracles help smart contracts find the necessary information to validate and begin executing it themselves.
Moving on to hardware oracles. Once again, it’s all in the name. Unlike software oracles, hardware oracles aren’t simply computer programs. They are hardware devices. They operate in physically isolated environments, therefore, they are less accessible to hackers, or other actors guided by malicious intents. This aspect makes hardware oracles stronger and more resilient in terms of security. Their purpose remains the same - to securely transfer data into a blockchain.
So, to sum up, the key difference between hardware and software oracles is the level of security they provide to a blockchain.
Practical Use Cases of Oracles
Furthermore, let’s concentrate on something practical - let’s move on from the question “what is an oracle in crypto?”, and talk about what they do. Specifically, what are the practical use cases of crypto oracles? Let’s zoom in on a specific example - Chainlink, the decentralized blockchain oracle network. As of writing, it’s the most popular oracle in the entirety of DeFi. It’s also the perfect example of a software oracle.
Here’s what it does. Whenever traders engage in buying, selling, or trading coins and tokens, in order for trades to be executed, the smart contract needs to be updated with the latest information about the actual value of a particular coin. For example, whenever a trader is about to make a swap from ETH to the USDC stablecoin on a DEX, a decentralized exchange, the oracle is the mechanism behind precise and reliable price evaluations.
Besides, if you feel like your knowledge about stablecoins or DEXs needs updating, be sure to check dedicated sections to these topics covered in this Crypto 101 Handbook! Now, let’s cement it: oracles in crypto are the tools that keep the network fresh and up-to-date with constant updates about how much a particular coin is valued every moment.
Furthermore, another crypto oracle use case is supply chain management. Think of an oracle as a GPS device. Just like it tracks the movement of a person, or a car, or a shipment, so does an oracle track the status of transactions of data, be it money, staking, swaps, or whatever, on the blockchain. Whenever a significant change takes place, the oracle gets updated, and sends out the signal to the blockchain.
In addition to these use cases, one more interesting example could be added: gaming. Think of it this way – as gamers continue playing games and climbing up the leaderboard, an oracle tracks the results and updates smart contracts on the blockchain with the latest achievements, progress, and stats.
Challenges and Risks
Now, no one’s perfect in this world. Oracles aren’t an exception, and even if you made a “best crypto oracles” list, you’d still find drawbacks with almost every one of them.
The main challenge that arises from using oracles is ensuring that the data they bring in is accurate and reliable. Instead of tampering with the oracles, attackers can manipulate the sources that oracles gather their data from. If the primary information point is compromised, the oracle will automatically transfer altered data to the blockchain.
Whenever an oracle relies on a single source of data, the risk gets high. This is where the term a Single Point of Failure (SPOF) comes in. It happens when there is a single point or entity that controls the oracle, and it gets compromised, thus hurting the trustless and decentralized nature of the blockchain.
A real-life SPOF example occurs when a power grid goes down because of a failure in a single power station. Just like a power grid, a blockchain network needs multiple sources of data to function properly. An SPOF oracle would mean that the network relied on a single point of informational input that got affected.
Wrapping Up
To conclude, oracles are like messengers of the crypto world, bridging the gap between the decentralized blockchain network and the traditional world of data and information. They enable smart contracts to access and use data from the outside world, making them a crucial component of the crypto ecosystem.
From DeFi to supply chain management and gaming, oracles have a wide range of use cases that are revolutionizing the way we interact with data in a fast, reliable, and decentralized manner.
However, with great power comes great responsibility. It's important to keep in mind the challenges and risks associated with oracles, and to implement measures to mitigate them. These challenges mainly consist of ensuring the accuracy and reliability of the data, avoiding the “Single Point of Failure” issue, and setting up enough barriers and protection from malicious manipulation.
So, whether you're a crypto enthusiast, a blockchain developer, or simply someone who's curious about the future of technology, being able to answer the question of “what is an oracle in crypto?” is essential.
