A Simple Introduction To DeFi Yield Farming
Just like how actual farmers measure their crop yield based on the total amount of crop that is grown, similar DeFi advocates have used the somewhat similar terminology called yield farming to measure yield based on the amount of interest on top of assets such as Dai, USDC, and USDT on when putting to use in DeFi platforms.
2020 has been a good year for the DeFi sector before yield farming came onto the scene.
DeFi Pulse reveals that there are around $1.9 billion in crypto assets locked in DeFi right now.
Meanwhile, the ICO market started churning around $1 billion in July 2017 just a few months before token sales started getting talked on mainstream television.
Yield farming is where you invest cryptocurrencies temporarily on a dapp or a startup app with a higher return on investment.
So, How Did It All Start?
In June, Compound started distributing its COMP governance token to the protocol’s users.
The demand for the token surged into a new high based on its automatic distribution structure. That itself pushed Compound as a leading DeFi player.
Crypto enthusiast started putting more value over DeFi applications, based on the exciting prospects of Compound’s COMP governance token.
Users can vote on the future of decentralized protocols through governance tokens. They are literally the crypto liquidity providers.
Tokens In DeFi Yield Farming
Tokens are like those money used in video games, where players use it to buy gears or weapons. However, with blockchain, tokens are not just limited to only video games.
Tokens could be earned in one while use in others, usually represent either ownership in something. For example, like a piece of a Uniswap liquidity pool or access to some service.
Similar example can be mentioned regarding Brave browser ads which can be only bought using basic attention token (BAT).
Tokens proved to be an immense use case for Ethereum blockchain such as that of the “ERC-20 tokens,” referring to a software standard that allows the token creators to write rules for them.
Tokens can be used in a lot of ways, even as a form of money within a wide range of applications.
For example, the idea for Kik messaging app ICO ideated on creating a token where web users could spend with each other with tiny amounts that it would almost feel like they weren’t spending anything.
Whereas governance tokens are completely different things. They are not like those tokens used in a video game.
Governance tokens are more like certificates to serve in an ever-changing legislature as they give holders the right to vote on changes to a protocol.
For example, MakerDAO and holders of its governance token, MKR, vote almost every week on small changes to parameters that govern how much it costs to borrow and how much savers earn, and so on.
In the end, all crypto tokens are tradable and have a price. So, if tokens are worth the money, then you can bank with them or at least do things that look very much like banking.
Yield farming has recently exploded in the DeFi scene. Crypto enthusiasts are now flocking over to this recent DeFi innovation and surely going to attract a lot of more people in the years to come.
However, its not all fun and games. As Ethereum stalwart Eric Conner recently highlighted that yield farming does have liquidation risks and smart contract risks:
REMINDER: farming yield is not risk free (duh, it’s paying 100% APY). There is liquidation risk and smart contract risk. Always remember that and tread carefully. 👨🌾 — eric.eth (@econoar) June 20, 2020
However, one needs to know that Yield farming is new and isn’t going anywhere.
The fact that yield farming isn’t going anywhere makes it yet another interesting use cases for Ethereum when it comes to fostering things that users want.
Cover Image: Unsplash
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