How to Yield Farm on Aave (AAVE) Protocol

Exploring yield farming on the Polygon network through Aave

Depositing money into decentralized protocols in return for interest—typically in the form of protocol governance tokens or other financial incentives—is known as yield farming. Other ecosystem members can then borrow this money on margin to utilize for different trading activities, or in the event of a decentralized exchange driven by an automated market maker (AMM), they can serve as liquidity to help with trade. As a result, yield farming offers consumers both passive and active ways to spend their cash that they would not otherwise have access to.

The first organized, user-friendly platform for Ethereum scaling and infrastructure development is called Polygon. The foundation of it is Polygon SDK, a modular, adaptable framework that facilitates the creation and linking of Standalone Chains, such as Polygon POS, that are intended to be flexible and independent, and Secured Chains, such as Plasma, Optimistic Rollups, zkRollups, Validium, etc. With more than 500 Dapps, ~567M+ transactions, and ~6M+ daily transactions, Polygon's scaling solutions have been widely used. Here's a step-by step guide on how to yield farm on Aave using a Polygon network.

• First, go to https://app.aave.com.

• Step 2: Connect to its Polygon market to begin yield farming.

• Step 3: Verify that you are on the Polygon Mainnet and link your wallet by clicking the connect button.

• Step 4: Select the asset you want to deposit from the list.

• Step 5: Click on the asset of your choice to view market data, including supply and borrowing totals as well as important metrics like the utilization ratio. Additionally, you may discover the maximum loan-to-value, or LTV, which indicates the collateral asset's maximum borrowing capacity.

• Step 6: To make a deposit, simply click the "deposit" button on the right.

Take out a loan using your assets as security.

• Step 7 (Optional): Choose the asset you want to borrow for by going to Aave's "Borrow" page.

• Step 8 (Optional): You can borrow against your deposited assets using the Aave protocol and pay minimal interest on the loan; use the maximum LTV (loan-to-value) as a reference.

We must be aware of a few terms before we can make the deposit:

• Health Factor: Based on the ratio of collateral to loan amount, the health factor indicates how safe your loan is. Maintain it over 1 to prevent Liquidation . A 1.5 health factor would be ideal and secure.

• Maximum loan-to-value ratio: The maximum borrowing capacity of a given piece of collateral is represented by the Maximum Loan-to-Value ratio, or Max LTV.

• The liquidation threshold: It denotes the point at which a borrow position becomes liable to liquidation for each collateral and is deemed undercollateralized. When the debt value of the collateral reaches 80% of its value, the loan will be liquidated, for instance, if the collateral has an 80% liquidation threshold.

• Liquidation Penalty: In the event of a liquidation, liquidators reimburse the borrower for all or a portion of the remaining loan balance. They can purchase the collateral at a reduced price in exchange, keeping the difference as a bonus!

• APR and APY: APR is the annual percentage rate that is applied to loans or earnings. First off, annual percentage yield, or APY, accounts for compound interest, but annual percentage rate, or APR, does not.