Cryptocurrency is one of the fastest evolving sectors, if not a profitable endeavor. The decentralized segment is consistently pushing innovation, unlocking new products, and potential. As a result, the sector has become notorious for coining (no pun intended) new jargon and concepts along the way. The latest buzzword amongst the enthusiasts and veterans alike is Yield Farming.
However, before we begin discussing Yield Farming and the different tenets associated with it, it is important to understand the concept underpinning this trend – Decentralized Finance or DeFi.
DeFi, to surmise, mimics traditional banking, but in a completely distributed and inclusive manner. This way, individuals can directly access financial services without any interference from intermediaries. It is worth mentioning that most DeFi projects are based on the Ethereum blockchain and make use of the protocol’s programmable smart contract feature extensively.
Thus, due to the innovations brought in by DeFi, individuals can now borrow and lend funds, avail of loans, and other services without any paperwork, KYC, or even credit score! All that was required was to place another cryptocurrency, such as Bitcoin or Ethereum, as collateral in order to receive dollar-pegged assets in return.
Initially, this methodology was popularized by Maker DAO, but as more competitors cropped up, this financial vehicle got refined further. The watershed moment arrived in June 2020, when Compound announced a new governance token, COMP, that would be given to liquidity providers (borrowers and lenders). This led to a massive surge in demand, and believe it or not, borrowers on Compound started making money by taking loans!
This practice of issuing governance tokens to the stakeholders in exchange for liquidity is known as Yield Farming or Liquidity Farming. There are a number of ways through which liquidity partners can earn steady rewards based on their activity.
They include:
- Trading Fees: Every time an asset is exchanged on the platform, the participant will earn a portion of the fees.
- Interest Rates: Similar to a bank, whenever someone lends funds on the platform, they will receive an interest rate.
- Rewards: Some platforms provide rewards on reaching milestones, while others might incentivize the user to increase their liquidity.
Fast forward to now, and we have numerous players in the market, each providing a unique value proposition. Let’s take a look at some key players and their USPs.
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- Balancer: This is a unique market-maker that allows individuals to create their own custom liquidity pools. What’s more! Instead of hiring portfolio managers to manage the funds, the individual can outsource this task to traders and collect fees from them in the process.
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- Curve Finance: This is a decentralized exchange that focuses on stable coin trading. By swapping stable coins or offering liquidity, individuals can earn from transaction fees on this platform.
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- Synthetix: As the name suggests, this platform features synthetic assets that track real-world assets’ value. By minting or burning new synthetic assets, users will become eligible to receive SNX as rewards.
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- Uniswap: This is by far the biggest fish in the DeFi ocean. With a whopping valuation exceeding $2.7 billion, Uniswap is a completely decentralized on-chain exchange. Participants in this network receive value by splitting the trading fees on the different transactions executed on the platform.
Yield Farming is helping unlock opportunity in the current cryptosphere. Today, the DeFi market alone is worth $11.24 billion, and it continues to grow at an unprecedented rate. The segment has helped realize the vision of decentralized applications and provide inclusive financial services for the masses. However, the most important aspect is that DeFi has helped rally the otherwise idle cryptocurrency capital into something far more productive.
While some may say that Yield Farming in DeFi is a pretentious method to get people on board the crypto train, this method’s overall impact in increasing cryptocurrency usage and adoption cannot be discounted.
