Following the strong development of DeFi is the huge influence of Yield Farming. It is not only attractive in DeFi but also receives a lot of attention from the Crypto community. So what is Yield Farming? These yield farming guidelines can help answer this question.
In this article, we’ll have a discussion into yield farming in detail and how it has created such a big buzz in the crypto world. Without further ado, let’s find out in the following article.
Table of Contents
What is Yield Farming?
Yield Farming can be generally understood as productive farming. If farmers measure their productivity by the total amount of agricultural products they have harvested, then in the crypto world or DeFi, participants will use its yield to make a profit.
To put it more clearly, Yield Farming means that users use their assets, here assets in Crypto, to find the maximum source of profit by becoming a liquidity provider at DeFi.
How Yield Farming Works
Users who join can become borrowers, lenders, or trade tokens with each other. And every activity is done through smart contracts.
Yield Farming is known to have a close association with AMM (automatic market-making) models, such as Uniswap, Balancer models, etc. For Yield Farming, loans are provided from those who provide liquidity through the pool. These pools can be understood as smart contracts.
Some Outstanding Yield Farming Platforms
Yield Farming has many prominent and extremely popular platforms such as MakerDAO, Compound, Uniswap, Balancer, etc. Each platform has different structures, but in general, they all provide profits through borrowing and lending to liquidity providers.
- MakerDAO: this platform will use DAI and perform productive farming at other major protocols such as Compound.
- Compound: the liquidity providers on this platform can profit from borrowing and lending.
- Uniswap: providers will collect transaction fees when they provide their assets to the pool here.
- Balancer: BAL combined with other governance tokens.
- Aavee: offers loans and flash loans. From there, it provides liquidity for other platforms, facilitating more farming.
Benefits That Yield Farming Brings
One way that Yield Farming has wonderfully attracted participants in the short term is by introducing the bootstrapping protocol. This is considered a new era that has been opened for the DeFi community.
Or the birth of Yield Farming also has a strong impact on other protocols, and this impact can let both go up. There have been many interactions with each other and there has been a strong development for both sides. But this is not sustainable, such as the case between Yearn Finance, Curve, and Balancer.
The two above are all short-term benefits and only exist in the short-term.
What Yield Farming benefits from is only seen in the short term, but it is considered bad soon. The main result that Yield Farming should do here is to create the value of its products associated with more real and life benefits. With a great hope that it will not only stop at Crypto but also become a major financial flow in the world in the future.
The Risks That Yield Farming Brings
Yield Farming exists big risks that if participants do not grasp they will potentially lose money like playing here. About what those risks are, let’s find out right here.
Risks Of Smart Contracts
The first risk appears in smart contracts. You know that these protocols are often developed by small teams, so the possibility of its bugs in smart contracts is easy. The root cause is not having enough budget to do the audit. But even with an audit, bugs can still happen and assets will be stolen easily. Cases have occurred like Curve or Bzrx.
Participants Can Be Liquidated
When the market is highly volatile, this can affect the user’s position and as a result, the collateral will also be highly volatile. This may lead to the liquidation of the user’s position.
Risk Of Bubbles Occurring
Bubble risk is a matter of concern. Since Compound launched Liquidity mining, many people have suffered the fear of missing out (FOMO), leading to the risk of bubbles occurring in the DeFi community.
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 have 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 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 and Curve and Balancer.
Both point 1 and point 2 are short-term.
According to Jesse Walden (former Associate of a16z), DeFi protocols that want to go long-term will need to rely on users and creators: “Profit hacking in DeFi is a short-term driver of growth. user. But the bigger game is to create long-term wealth by building (and owning!) a piece of products and services that billions of people will use every day.”
Final Words
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 traditional financial flows in the future.