What is Yield Farming? Learn about the term Yield Farming
What is Yield Farming? What are the featured Yield Farming platforms? Yield Farming Opportunities and Risks. Let’s find out through this article.
Yield Farming is a hot topic these days in the crypto community in general and DeFi in particular.
However, in order to make money safely by taking advantage of this method, you need to thoroughly understand how it works. Follow along with the following article.
What is Yield Farming?
Yield Farming is a term that refers to users trying to generate as much profit as possible from their crypto assets, through providing liquidity to DeFi (Decentralized Finance) protocols.
Yield roughly translates to profit, Farming roughly translates to farming. Yield Farming roughly translates to profitable farming. In this article, I will keep the terms “Yield Farming”, “Yield”, “Farming”, “Farm”.
How does Yield Farming work?
Yield Farming is closely related to the Automated Market Maker (AMM) model. Popular AMM models include Uniswap, Mooniswap, Balancer…
In Yield Farming, Liquidity Providers (abbreviated: LPs) provide liquidity to the protocol’s liquidity pools.
Liquidity pool is simply a smart contract that contains money in it. These pools allow users to borrow, lend or exchange tokens.
The revenue generated by Liquidity Pool is the transaction fee when end users perform activities in the pool, such as borrowing, lending, exchanging tokens.
This revenue will be divided back to the LP according to the percentage of liquidity they have provided in the pool.
In addition to fee revenue, some protocols implement liquidity bootstrapping for the protocol by distributing native tokens to LPs that have provided liquidity into their protocol (either across the protocol pool or several pools Nominated). This is called Liquidity Mining.
Liquidity Mining can be understood as a narrower concept than Yield Farming. Specifically, LPs will not only receive money when providing liquidity, they will receive another new amount of tokens.
Outstanding Yield Farming Platforms
Some popular Yield farming platforms in DeFi:
- MakerDAO: Use Maker mint for DAI, use DAI for yield farming in other protocols like Compound.
- Compound: Provide liquidity to Compound to farm COMP and earn profit from borrowing and lending.
- Uniswap: Provides liquidity to the pool to collect transaction fees.
- Balancer: Farm BAL and other governance tokens support pools on the Balancer.
- Synthetix: Use SNX mint sUSD, bring sUSD to provide liquidity in pools on other platforms.
- Aavee: Borrow and lend money, flash loans. From there, providing liquidity in other platforms, farming more.
- Curve Finance: Provides liquidity and collects fees, interest and CRV.
- yEarn Finance: Provide liquidity and collect fees, farm YFI.
Influence of Yield Farming
Yield Farming’s influence in DeFi is undeniable. DeFi has grown rapidly after Compound launched Liquidity Mining with COMP governance token.
This event then led to other projects launching similar programs to attract liquidity to the protocol, causing DeFi to heat up like never before.
Liquidity is poured from one protocol to another. High profits combined with a strong increase in the management token price have made the capital inefficient (unproductive capital).
Start moving into Defi protocols to do farming and make profits, become productive capital.
Money is pouring into DeFi, so DeFi projects are constantly appearing with new distribution methods, taking advantage of available protocols. Typical among them can be mentioned Yam Finance.
The result: Total Value Locked (TVL) in the DeFi ecosystem has increased more than 7 times, from 1 billion to 7 billion dollars within 3 months.
For those of you who do not understand Total Value Locked (TVL): TVL is an metric used to measure the “health” of yield farming and DeFi platforms.
TVL measures the amount of crypto assets locked in DeFi protocols such as lending protocols and others.
In addition, governance tokens and related DeFi projects have both increased sharply.
Price movement and trading volume of $COMP
Looking at the chart above, we can see that the price of COMP reached its peak (ATH) in June, thanks to COMP farming which caused a huge increase in COMP demand.
Risks of Yield Farming
Most of the Yield Farming strategies that bring APR/APY (Annual Percentage Rate/Annual Percentage Yield) are mostly very complicated and require users to have a very clear understanding of the key factors. what they are doing.
If you do not really understand how real exchanges work, the possibility of losing money is very high.
Some risks of Yield Farming:
Smart Contract Risk: Most protocols are developed by small teams, with little capital, so there is an increased possibility of bugs in smart contracts (because there is no budget to audit). Audited Protocols are still capable of bugs and stolen money as in the case of Bzrx, Curve…
System Design Risks: In some protocols like Uniswap, the provision of liquidity can expose LPs to an impermanent loss when the price of an asset in the pool fluctuates very rapidly… or LP may be fully cashed out when providing liquidity as was the case with Balancer.
Liquidation Risk: Collateral can be subject to extreme volatility and users’ positions to be liquidated during extreme market volatility.
Bubble Risk: Since COMP launched Liquidity mining, the whole DeFi community started FOMO a lot, leading to the risk of bubbles appearing in DeFi.
Yield Farming – Game of the Whales
The winners in this game are the Whales – those who take tens of millions of dollars to farm, thereby earning governance tokens.
Whales simply has a relationship with the project, spending large farm money making the odds of the odd players smaller.
Early FOMO retail investors can make a lot or lose their investment. Those who lose money will be the ones who FOMO in later, when the price has gone too high.
So to reduce risk, we should be early farmers and buy some governance tokens at an acceptable price as playing the lottery.
Some thoughts on Yield Farming
Firstly, Yield Farming has opened a new era for DeFi with protocol bootstrapping through liquidity mining. This can be said to be a good way to attract users in the short term.
Second, when the protocol launches Yield Farming can affect other protocols, to go up together.
But, this interaction will not be sustainable when yield decreases. Typically yEarn, bootstrapping for yEarn as well as Curve and Balancer.
Both point 1 and point 2 are short term.
Through this article, we have learned together an overview of one of the hottest keywords today – “Yield Farming”.
Although the short-term profit that Yield Farming brings is very attractive.
But for it to be more than just a fading trend, creators in the DeFi space need to give their products more real-life benefits.
Hopefully we can see Yield Farming not only in the crypto space but also in the mainstream of traditional finance in the future.
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