Yield Farming, One of the Reasons for the Explosion of DeFi

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Yield Farming, one of the Reasons for the Explosion of DeFi

This trend partly explains the interest of DeFi with a massive inflow of liquidity on the various best-known bricks such as Compound, Curve or Uniswap. This offers an opportunity to earn a token in addition to an interest rate or commission earned on each trade. Without cash, no DeFi!

Yield Farming


Thus, it makes it possible to make decentralized services more interesting than some classic exchanges such as Kraken and Coinbase on the exchange of a few pairs of assets. Hence an explosion in volumes on the Uniswap platform, whether for the UNI token or other services requiring to be a liquidity provider in order to obtain a new token and therefore an attractive return.

Different Types of Fields to Farm

The term yield farming can be illustrated by different activities, with higher or lower annual interest rates depending on the risk of the project. Let's sweep some of these activities, from the least risky to the most risky (highly subjective ranking):

Generate Interest

The first activity that is most accessible to everyone is to deposit their cryptocurrencies on services such as Compound or Aave. In exchange for this deposit, you receive an interest rate that fluctuates according to supply and demand - the amount available to borrow. On this day, the rates between the different assets fluctuate between 0.1% and 40%.

The higher rates are explained by loans giving access to more attractive rates. Rates can collapse in a matter of days, yet this is one of the least risky activities when it comes to yield farming.

In calculating the return, depositors and borrowers on Compound receive in proportion to their possession COMP governance tokens. They are valued by the market and can be sold or kept to participate in the votes.

The Vaults

The second activity is offered by Yearn, and the famous “vaults”. This involves depositing your cryptocurrencies in smart contracts acting as an "automated hedge fund" which will apply a strategy, in this case the one offering the best return to date. The vault is able to change its strategy if a better return is observed.

You can deposit stablecoins or other Link-type assets there. The returns are attractive and the result of the automatic sale of governance tokens obtained by the strategy.

The return is affected in the assets deposited in the Vault. The risk lies in the vault code, or the strategy that can be based on a CDP, that is to say a mutualized debt contract between all depositors.

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Become a Liquidity Provider

The third activity is the staking of its cryptocurrencies in liquidity pools on Uniswap or Balancer for example. The LP (for liquidity provider) receives fees on exchanges that pass through these pools. However, beware of the risk of impermanent loss inherent in the way in which decentralized trading platforms are built.

Excessive price variations between assets cause these phenomena of loss of part of the capital. It is therefore necessary to calculate in advance the potential variations in assets in order to have an idea of the risk incurred.

Growing Tokens : 1st Method

The fourth activity consists in putting into play a stablecoin or a governance token (type USDT, YFI or COMP) to obtain in exchange a new token. If the contract is audited, the activity itself is not very dangerous. Let us quote YAM or Harvest.finance which are in this case after a few hours or days so that the community can give its feedback on the reading of the contracts.

Many projects try to ride the wave, with the risk of losing its capital if the project is fraudulent or of not covering the transaction costs if the token is not purchased on decentralized exchange platforms as the listing is technically simple.

On these projects, farmers are fond and looking for issuance rates of these worthless tokens of 1,000 to 30,000%, in many ways the rates are misleading and will drop as volume grows on contracts.

A small number of projects will be interesting to consider in a sea of ??irrelevant projects, especially if it does not result in any product. YAM being the first token and first project in this vein may make sense to some.

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Growing Tokens : 2nd Method

The fifth activity is close to the fourth, but represents a greater risk, because the token that is involved is no longer a token, but a token representing a portion of the cash deposited on services such as Uniswap or Balancer.

You therefore add transactions to the process, which involves costs, but also and above all a risk of losing your capital, especially since the market is very volatile and therefore unstable. Uniswap in addition to the UNI token airdrop to historical users offers to collect UNIs in this way. Hence a massive influx of liquidity on the peers below.

Note, it takes about $ 30,000 to put in liquidity to cover only the costs incurred each day to dispose of the UNI obtained. Uniswap being the most interesting and solid project of this fifth activity.

Farming for All?

The least risky activities are within the reach of all cryptocurrency holders who know how to use MetaMask, Money or their Ledger. This is a strategy that makes sense to make your cryptocurrencies work as long as the returns cover at least the necessary transaction costs.

Do not take decisions on a whim and prefer to waste a little time in order to obtain all the necessary guarantees on the soundness of a project. The strategies that are currently the riskiest make no sense and cannot be sustainable.

Finally, a low exposure of its portfolio to the most solid projects and having a product with strong indicators (value blocked in contracts or number of users) is more attractive than an unstable interest rate offered by a project. doubtful.

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