Na DeFi The Money Dey joo.

Decentralized Finance, also popularly known as DeFi, throwing vibes that may put the 2017 ICO craze to shame. The crypto community is going crazy over it. Google trends show the highest search request for DeFi was in the week ending September 5.

And yet many are baffled with it and are unaware of what they can do or how to participate in the next revolution.

DeFi is turning heads with Yield farming. Early users made thousands of percent in profit by simply understanding the concepts before the masses can learn about it. A huge population is still not participating in Yield farming and DeFi in general because they don’t really understand it that well. Hence, let us understand Decentralised Finance and Yield Farming today with this article.

Decentralized Finance

According to DeFi Pulse, there is $7.1 billion in crypto assets locked in DeFi right now.

Some of the advantages of DeFi include immutability, transparency, permissionless, programmability with smart contracts, and more. Most importantly, all the funds are actually in self-custody instead of a cryptocurrency exchange.

Adding spice to DeFi, the sector started receiving prominent recognition after Ethereum based credit market Compound started practically giving away COMP — the governance token, to the protocol’s users.

The term “Yield Farming” became popular since, and it is simply used to describe how users can temporarily put their crypto holdings in such protocols and earn their tokens rapidly. Another term less used for this is “Liquidity Mining”.

What is Yield Farming?

When you put your money in the bank, you get interested. In the cryptocurrency world, when you stake your assets, you may receive interest or fees as a reward. This depends from project to project. When a protocol gives you high amounts of newly generated cryptocurrencies in return, and users keep switching from protocol to protocol to maximize the return, this is broadly known as yield farming. These tokens can rapidly appreciate in value and make the early investors rich.

So imagine someone asks you to deposit Rupees and Dollars with them, in return they will give you thousands of little coins every few minutes as a reward. Maybe these little coins have no value in the beginning, but if someone starts accepting it as a valid payment or they can be used for some service, thereby creating a use case for them, these little coins can make you very wealthy and your original rupee and dollar is safe in a smart contract that you can extract anytime you want.

Different Types of Yield Farming?

Liquidity Mining:

If a trader wishes to convert ETH to MATIC, on a centralized exchange like Binance, there are both buyers and sellers matched to each other. However, for decentralized exchanges of 2020, to offer immediate swaps with the highest possible value, the protocols allow users like us to provide our tokens as liquidity on these protocols.

When a user tries to swap ETH to MATIC on a DEX like Uniswap, the protocol simply deposits ETH and withdraws MATIC from the vast liquidity it has acquired from liquidity providers.

These Liquidity providers earn the trading fees paid by the traders swapping tokens.

Some examples of platforms offering Liquidity mining are Curve Finance and Balancer.

Token Farming:

Users can earn native tokens from Protocols like yEarn and Compound after providing liquidity to the pools. When the pool has less quantity, the reward rate tends to be higher and hence attracts more and more “farmers”.

Protocols like Ampleforth, BNS Finance leverage liquidity pools from other platforms like Uniswap to distribute rewards. Users are required to add a set of tokens to pools on Uniswap and then stake the Uniswap tokens on the platform to start farming the protocol’s tokens.

Each protocol uses a different strategy to reward its users. Many have various use cases for their platform tokens as well.

Yield Farming is Complex by Design

The end game in Decentralised Finance is the ability to replicate the speed and efficiency of transactions in traditional finance.

Building such an ambitious project to be fully decentralized requires all stakeholders to be rewarded well enough to be part of the ecosystem.

It begins with having enough tokens in the vaults of the protocols to always be able to fulfil the requirement of the trader/customer. Thereby, liquidity providers become quintessential to the ecosystem. To keep liquidity providers, they need to be incentivized with rewards, and just the right amount. Too much and the token value can be diluted, too little and LPs can jump ship.

A lot of computation goes into the formulae built to make these protocols sustain and remain trustworthy without truly required to be trusted.

With over 7 Billion USD locked in DeFi, the race is on for who will survive the test of time and emerge a true winner.

Until then, you and I could try to farm some tokens and increase the size of our portfolio.

How are Yield Farming returns calculated?

Some commonly used metrics are Annual Percentage Rate (APR) and Annual Percentage Yield (APY). The difference between them is that APR doesn’t take into account the effect of compounding, while APY does. Compounding, in this case, means directly reinvesting profits to generate more returns.

However, be aware that APR and APY may be used interchangeably. It’s also worth keeping in mind that these are only estimations and projections. Even short-terms rewards are quite difficult to estimate accurately. Why? Yield farming is a highly competitive and fast-paced market, and the rewards can fluctuate rapidly.

If a yield farming strategy works for a while, many farmers will jump on the opportunity, and it may stop yielding high returns.

Yield Farming Platforms:

The basic idea is to deposit funds in a smart contract and earn rewards. But it shouldn’t be done blindly.

So let’s look at a few popular Yield Farming platforms used worldwide.

Compound Finance:

Curve Finance:

MakerDao:

Synthetix

What is a synthetic asset? Practically anything that has a reliable price feed. This allows virtually any financial asset to be added to the Synthetix platform. Virtually anything can be used as an asset for yield farming.

Uniswap

Many platforms have yield farming strategies designed to work require users to add liquidity to the pools and then stake those LP tokens for yield farming.

Aave

Aave is used by yield farmers extensively.

Yearn. Finance

Yearn.finance is useful for farmers who want a protocol that automatically chooses the best strategies for them.

There are many other Decentralised protocols that allow users to continue to improve their Yield farming strategies.

Drawbacks and Future Solutions

This leads to another problem where it makes it impossible for traders to start farming with low capital. A minimum of $1000 is required to see some earning in almost all the protocols.

However, there is a solution. Several projects are now aiming at layer two solutions to move the DeFi market. Layer two solutions like Matic use side chains to speed up transactions and only send a transaction on the mainnet at certain intervals aka checkpoints.

Use of layer two protocols can easily take the load off the mainnet, speed up transactions, reduce fees and make DeFi, and yield farming more accessible to everyone.

Many projects have started building DeFi protocols on Layer two, one of them is EasyFi. EasyFi wants to bring yield farming to everyone. It will be built on top of the Matic network because of the aforementioned drawbacks of the Ethereum network.

EasyFi will offer micro-lending, Credit default swaps, under collateralized loans with credit delegation — one of a kind trust-based loans, something currently unavailable in the market.

Farmers can earn rewards in “EASY” tokens by adding their assets to the liquidity pools and enjoy gas-less transactions.

Decentralized Finance is both exciting and adventurous. DeFi can help create a more open and accessible financial system available to everyone. Ironically, before DeFi became a buzzword, the concept was actually being thrown around as Open Finance.

Stay tuned for more news & updates. You can also follow me on twitter

Blockchain Engineer and A.I engineer