Updated: Mar 10, 2021
At the time of this writing, the biggest trend in decentralized finance is "yield farming", which is just a quick way of saying strategies that involve temporarily placing your cryptocurrency into various DeFi applications offering huge returns. Often these returns aren't sustainable, but if you can get your crypto in and out in time, the money grows nicely in your favor. Obviously, this kind of investing requires a more seasoned crypto trader and a lot of due diligence. This post will get more into this, including a video that'll further bring some light to this topic. However, if you don't know what DeFi is, it's better if you educate yourself with this post first.
In the simplest terms, yield farming is any strategy that puts crypto assets to work to generate the most returns possible. For instance, we talked about Compound in a previous post. On a weekly basis, a yield farmer might move crypto around within Compound, constantly chasing whichever pool is offering the best annual interest. Of course, this might mean moving into riskier pools from time to time, but risk is the name of the game if you want to maximize your earnings.
Yield farmers typically use stablecoins, such as Dai, Tether (USDT) or USD Coin (USDC), since they provide a quick way to track profits and losses. However, it’s also common to farm solid returns using cryptocurrencies such as Bitcoin (BTC), Chainlink (LINK) and Ether (ETH).
Liquidity Mining Fuels Yield Farming
Liquidity mining is the biggest reason for Yield Farming's popularity. Liquidity mining is when a yield farmer gets a new token as well as the usual return in exchange for the yield farmer’s liquidity.
For instance, let's say your collecting yield on your holdings of Ethereum on Compound. That was just the normal operation of the Compound platform. But now, Compound will also give a sizable amount of its ownership to the people using it, in the form of the COMP token. As more and more yield farmers collect COMP, it drives the price of COMP up-- which will eventually prompt these investors to sell and collect profits.
By giving away some of Compound's ownership to users, it makes it an increasingly popular platform for lending and borrowing. In liquidity mining, a borrower can amazingly earn a return on a debt from their lender. A future post will get further into the details of this.
Yield Farming - Watch the Video
Sometimes the best way to learn about finance is through video. This is especially true with the complexities of Decentralized Finance. Enjoy this video by Finematics.
A Great Opportunity
With most DeFi apps being built on the Ethereum blockchain, there was a growing concern that its lack of scalability will result in slower confirmation times and spiraling transaction fees. Their concerns were well-founded, since in the last few months, Ethereum's fees hit record highs.
However, this presents a great opportunity for Ethereum’s many competitors, including Binance. The Binance Smart Chain has emerged as a leading alternative option for yield farmers. They flocked to Binance network to take advantage of their newly created applications, such as BurgerSwap. Other competitors in this space include the emerging Cardano blockchain, which I'm especially keeping my eye on. Stay tuned for many more posts highlighting the wonderful opportunities emerging out of DeFi.