Yield Farming is the reason we've been talking about DeFi so much recently. But unfortunately, many interpreted them as a return of what we had seen with ICOs as soon as they appeared: A string of undertakings that were more promising but empty for the majority.
Yield farming, however, is not dead; in fact, new ventures have emerged. The latter is constantly gaining more users and Yield Farming fans investors. Liquidity pools go hand in hand with this. It is also what yield farming is all about.
To make it simple. Yield farming temporarily puts a particular quantity of tokens in an application (which is already running) to earn additional tokens.
These standards have even carved out a new landscape and are now at the heart of DeFi.
Let's have a look at what Yield Farming is all about!
Yield Farming: Background
If we go back to the beginning, the Compound protocol is where it all began. The Compound was one of the first Ethereum-based protocols to create interest rates on specific currencies. As a result, we may earn cryptocurrency without a centralized system. It was decentralized there, with Compound. Because it was pretty novel at the time, there was a lot of enthusiasm right from the start.
And, more specifically, when Compound began issuing its governance token, the COMP, to protocol users, the excitement was palpable.
It is where we first heard the term "liquidity mining."
You may grasp the point of these platforms if you understand the idea of liquidity. It is, in fact, critical. There can be no transactions or exchanges without liquidity.
It created a lot of noise, both in the media and among cryptocurrency investors. They were starting to talk a lot about DeFi, "Liquidity Mining," and, of course, the renowned Yield Farming at the time.
As a result, all traders were ecstatic when sites like Veneraswap arose. Veneraswap, for example, enables consumers to become liquidity providers. They were given a Veneraswap token in return for their "money."
Veneraswap's popularity can be attributed to several factors. However, the most apparent benefit is the profit we could derive from it.
Then you might win numerous times in a row:
- With a rise in the price of the token we're using, we might be able to win.
- Earn more tokens by taking advantage of the platform's interest rate.
- Alternatively, you can profit from transaction commissions.
- Even though we saw Yield Farming pop up on places like Reddit, it was not extensively used at the time.
Some will start making farmer memes that juxtapose his situation with loser traders. However, unlike traders on controlled platforms (CEX), farmers have several benefits and can seed valuable tokens inside fruitful protocols.
Yield Farming is growing increasingly popular, and the word and its application are gaining traction, boosting the number of DeFi and cryptocurrency enthusiasts in general.
The mild lunacy of Yield Farming is growing: the incentives are becoming more powerful
Yield farming entails investing in a specified number of tokens to receive incentives. In the realm of cryptocurrency, this is not a novel notion. We didn't know about Masternodes or even staking before then. Indeed.
There, it's all completely different in terms of concept and execution. Yield Farming is a concept in which users receive tokens in return for participating in DeFi apps. Furthermore, now we talk about Yield Farming when previously we talked about "liquidity Mining." To use the most common word at the time are indications that we were producing a coin; it was called liquidity mining.
The passion for Yield Farming spread like wildfire, similar to what we saw with the ICO bubble in 2017.
Then, with each new initiative came new local tokens and methods to gain prizes. A virtuous loop generated demand. Individuals were intrigued by the promised profits, and the tokens were increasing value as more people joined. This similar admiration was likely to draw new people as well. That creates a virtuous spiral.
These businesses even offer large profits and award ex nihilo to build this loop.
These are referred to as "incentives to usage." To play a game, you are given coins. The more you accomplish in the chamber, the more tokens you will receive.
Of all, there's nothing like high-yield incentives to entice new consumers.
What is Yield Farming, and how does it work?
Yield farming has changed over time, as we shall see below, and there are now various types of yield farming. It also relies on the features of the platforms in question.
We can tell you to help you comprehend that it all started with paying customers a tiny portion of transaction costs in exchange for helping to build liquidity to a specific application. It has usually been the case with Uniswap.
Then, as the situation became more complicated, we compensated the liquidity provider with a native token. We can safely assume that the notion of Yield Farming took off here. It was the case with the Compound application, which declared that users of its network would get COMP tokens.
Compound rose to the top of the rankings in a matter of days.
Then, by providing further incentives, new ventures were formed. For example, their token gave them access to possibilities to engage in the project's governance.
The different types of Yield Farming
However, when discussing Yield Farming, keep in mind that there are different types of yield farming. There are many distinct fields to plough as varied farmer profiles behind these disparities.
Interest rates might be higher or lower; the highest rates are frequently associated with the riskiest enterprises. It goes without saying. And the other way around.
Let's have a look at the various types of Yield Farming.
Simple Yield Farming To Generate Interest: it is, without a doubt, the most well-known and oldest variant of Yield Farming. It's as simple as investing a particular quantity of tokens on platforms like Aave or Compound, for instance. (Both were forerunners of the genre.)
These platforms cater to two sorts of users:
1. As a depositor, you will be rewarded with interest.
As a borrower, you will get a line of credit based on the amount of money you deposit.
Depositors and borrowers will receive governance tokens after that. These coins can also be used to vote on governance projects on the site. As a result, you'll be able to vote on specific project aspects. You may also speculate on the token and sell it to profit from capital gains, significantly if its value rises.
Yield Farming is a type of farming that produces a lot of money.
Those looking for better yields will be interested in this sort of Yield Farming. YearnFinance, released in January 2020, is undoubtedly one of the most well-known protocols that enable this. These are recent efforts, to be sure.
For example, Yearn finance will employ a series of smart contracts to swap assets across multiple liquidity pools to maximize these activities' revenues. From this perspective, the smart contract will automatically examine the market's various situations to execute a profit-maximizing plan.
It was and continues to be highly inventive.
For example, Andre Cronje, the company's founder, wanted to make yield farming more accessible and more automated. The YFI token suffered a price explosion of more than 6000 per cent less than 24 hours following the platform's introduction. The founders were the first to be taken aback.
2. Become a Liquidity Provider and increase your Yield.
We've returned to the topic of liquidity! But, again, we have said that it was critical on any platform, particularly DeFi.
Yield Farming in this form is perhaps the most well-known.
We've noticed a rise of people interested in becoming liquidity providers, especially with the launch of Veneraswap.
The liquidity provider will get commission fees on transactions executed on these platforms.
Even while we might hear stories of people who had made a lot of money using this technique initially, it was not as successful for little investors.
The latter can have a variety of structures, such as "permanent loss" criteria, which can cause price volatility. As a result, there may be a loss of funds received or invested.
Does Yield Farming provide opportunities for DeFi and the cryptocurrency world in general?
Before introducing various protocols based on blockchains other than Ethereum, such as the Binance Smart Chain, it was assumed that these projects would self-destruct. Indeed, transaction costs on Ethereum have reached an unsustainable level, exceeding the transaction amounts themselves. The primary issue of Ethereum is that it becomes congested when many users use the network, nearly putting an end to these protocols.
As the saying goes, some people's misfortune is the enjoyment of others. And Ethereum's faults have prepared the way for alternative blockchains that are more suited to tackling the challenges that Ethereum is working hard to solve.
However, we are seeing new protocols emerge that are far more efficient and quicker than those now in use on Ethereum. It has given these platforms and Yield Farming, in general, a fresh lease on life.
Furthermore, the Binance Smart Chain's enormous popularity can be explained, in part, by the enthusiasm of yield farmers who viewed it as a potential substitute. BurgerSwap, for example, is one of the new protocols that has appeared there.
So, just when we thought we'd seen the last of these regulations, they reappeared, more vital than ever.
Liquidity mining
Yield farming is inextricably linked to the development of the liquidity mining approach. Compound and its COMP token illustrate its uniqueness: the Balancer protocol, BAL, and (YFI) tokens utilize this method.
The latter had the fastest climb of any governance token to date, with a price increase of more than 6800 per cent in less than 24 hours following its introduction.
Or Synthetix, Curve, and Ren have teamed together to build a Curve-based Bitcoin-related liquidity pool (sBTC, renBTC, and WBTC). Synthetix and Ren are providing an unspecified number of BAL and a weekly bonus of 10,000 SNX, 25,000 Rens, and an undetermined amount of SNX for Yield Farmers.
Free money offers that can nearly always be mistaken for fraud.
Is Yield Farming a DeFi-friendly practice?
On this subject, people have differing viewpoints. However, it is an irrefutable reality that liquidity provision is critical to the successful operation of DeFi protocols. And Yield Farming will continue to be a key supplier in the field, at least for the time being. Furthermore, the Compound has never veiled its desire to introduce currency into its universe to secure decentralization and provide active service to "regular" customers. In any case, this is the primary and official reason for the COMP token's launch.
This Yield Farming activity is visible within DeFi. The amount of money that has been frozen in its universe has risen to 3.5 billion dollars today. Consider the situation of Balancer, which provides a service that is quite comparable to Uniswap but does not have the same clout.
The launch of its BAL liquidity mining token moved it to second position among decentralized exchanges (DEX) in terms of liquidity, considerably ahead of Uniswap. Even though the latter has remained at the top of the trading volumes for the past 24 hours, accounting for more than a third of all trades.
Conclusion
As a result, the Yield Farmer is now a full-time player in the DeFi world. Because of its liquidity, it is a highly courted actor in finance under construction. The Compound has stated that it would use its COMP token to water the rich plains of DeFi for the next four years. There's no doubt that these forerunners of a new genre will stick around for the long haul.
The good news is that this cash bonanza will most likely allow persons capable of hijacking DeFi protocols to do it inside the framework of Yield Farming rather than through hacks or harmful diversions for a while.
It will be fascinating to watch if Balancer's liquidity mining incentives enable it to surpass Uniswap in actual service utilization. Or if, like a snake chewing its tail, this rise is purely artificial and advantageous exclusively to Yield Farmers.
