Yield Farming in Crypto Space: Fundamentals and Future of the Market

Yield Farming in Crypto Space: Fundamentals and Future of the Market

Yield farming has been a promising trend in recent years in the field of cryptocurrency. The matter is not only smoldering in bitcoins — even though there is a great demand for them now. The infrastructure of decentralized financing (DeFi) particular strategies and methods have appeared in the crypto space. They provide ample opportunities for profit - for example, growing crops, which we will talk about in today’s material.

This method seems surprisingly straightforward. With the help of smart contracts, the user provides their funds to other participants. In exchange, they pay you a commission. However, everything is not as simple as it seems — farmers are coming up with more and more strategies, moving funds between different lending markets. Everyone is competing to see who will get the maximum profit in the least known way. That’s why we’ve decided to assess all the risks, discuss platforms and the future of Yield Farming.

What is Yield Farming? 

In simple words, this is a new effective strategy that is gaining popularity. Investors turn to it when they want to increase their profits. The owners of cryptocurrencies block their assets in exchange for a commission — an additional cryptocurrency can be either a fixed percentage or variable value.

Operations are carried out based on Ethereum and its ERC-20 standard; for Ethereum, this is an opportunity to receive part of the reward. But experts note that soon cross-chains and Yield Farming will come to other blockchains. After all, more and more users want to become part of the crypto space.

Many terms are appearing in this topic that should be discussed. For example, a liquidity pool is a smart contract with funds from rewards. Users are rewarded by providing liquidity to the collection. This way, you become a liquidity provider (LP).

Farmers move funds between different protocols to find the harvest as much as possible. It is an incentive for DeFi platforms to be more attractive to farmers and attract more liquidity.

How does Yield Farming work?

We talked about this earlier but did not designate the term — automated market maker (AMM). It is adding your funds to the liquidity pool — this makes you a participant in the process. A commission is charged for using DeFi platforms; then, these payments come to liquidity providers by their share in the liquidity pool. It is the basis of AMM. By banning funds from the pool, you receive commissions that are issued by the DeFi platform. 

Payments can be made in several cryptocurrencies. It allows farmers to lock assets already in other DeFi platforms to increase profits. The task is not as simple as it seems. By providing liquidity, you receive a reward depending on the volume of this very liquidity. In crypto holdings, it means more capital, more commission.

What do professionals in the crypto space advise before joining farmers? First, remember that the profit depends on the rules of the protocol you use and the number of your funds. It should also be taken into account that investing in ETH is not yet Yield Farming. But lending without storage and receiving a reward is what you need.

What coins are used in Yield Farming? Often these are moments tied to the US dollar, although this is not a mandatory requirement. For example, you can use DAI, BUSD, and others. Some protocols even mint coins by adding the letter "c" before the name of the currency.

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What is DeFi?

DeFi (decentralized financing) is a financial application based on blockchain, cryptocurrencies. This system disrupts the activities of financial intermediaries - work without banks, insurance companies, credit unions, etc. Such a system is great for farmers, where they can freely dispose of funds using automated smart contracts.

DeFi works on the blockchain, making the system more transparent and secure; it is considered an extended version of the blockchain. In DeFi, complex financing options are possible in the form of lending, growing crypto products, etc.

Need a deposit? Okay, no problem, DeFi has an increased interest rate, covering inflation rates, unlike conventional banks. DeFi also boasts a high transfer rate and reduced commission. DeFi is an open platform where a large number of people can enter and work with money. They would not do this in a centralized banking system due to a lack of funds and political/social problems.

It was on this basis that Yield Farming appeared in the crypto space.

Collateral in DeFi

Collateral is a process in which the borrower’s assets are a guarantor for the lender. It means that if the borrower does not repay the loan under the agreement, the lender will reimburse its losses. Collateral needs to be provided every time you borrow assets.

In DeFi, the software is essential, but the importance varies from protocol to protocol. For example, if the collateral does not meet the standard in the open market, the collateral is liquidated. To avoid this trouble, deposit a little more than the required amount as collateral. Why can this happen? Due to different provisioning ratios on other platforms.

Let’s give an example: you have chosen a platform and decided to borrow assets. The platform says that we have a security ratio of 200%, which means that for every 100 dollars you can take 50%. But an unexpected or violent collapse of the market may occur, and to avoid being left with nothing, it costs more money to deposit than the platform requires. It is also possible to meet exorbitantly significant security coefficients - 500, 700, and 900% in some places. The platform must ensure its safety.

More about the future of DeFi you can read here.

Yield Farming. Stock market broker working with charts of global currency data

The popularity of Yield Farming

The most crucial advantage is a lot of money. High-interest rates guarantee rewards; in crypto holdings, all this gives a good profit, which is difficult to refuse. 

2020 is rightfully considered the Farming year when vast amounts of money were earned on Ethereum and DeFi. After such a surge, investors and ordinary people became interested in the scheme. Also, a huge plus is the initial stage of the entire system and the growing number of new protocols. The more interested bright-eyed people there are, the more interesting, thoughtful, and profitable platforms appear.

The increased popularity of Farming can also be explained by the launch of the COMP token (managing the ecosystem of complex finance). To ensure the decentralization of the system, there is an algorithmic distribution of tokens with liquidity incentives.

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Comparison of farming and other ways of obtaining cryptocurrency

It can be difficult for beginners to distinguish Yield Farming from, for example, crypto mining. To not confuse concepts, not be deceived, and know precisely what you are doing, we will analyze the differences.

Yield Farming vs. liquidity extraction

Both work with DeFi; what’s different about them? Firstly, liquidity mining works with a proof-of-work (POF) algorithm. Here you can get a dividend swap (0.3%), and with Yield Farming, the point is to move funds between different platforms.

Yield Farming vs. Crypto Mining

Both are linked to mining pools, but what are the differences? Crypto mining works based on a proof-of-work algorithm. In turn, farming is associated with DeFi and Ethereum. Many consider farming to be an improved way of making money with the help of crypto holdings without permits. In Yield Farming, there is a lending and commission scheme, and in crypto mining, you can enter new coins, earn rewards with the help of new blocks.

Yield Farming vs. Bets

The stakes are fundamentally different from growing a crop. How do bets work? Based on consensus, which confirms the bet and pays the winnings, or based on PoS, where blocks are created, investors pay rewards. And Yield Farming is passive income based on loans and commissions. In betting, the more cryptography you have and the older the coin, the easier it is. Farmers do not have a cut for the time and maturity of coins.

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TVL: find out the state of the crop

The total blocked value is needed to see the state of assets with a crop deficit. In other words, the amount of cryptocurrency stopped in DeFi.

TVL is an indicator that shows the aggregation of liquidity in liquidity pools, reflecting the productivity and market share of different platforms.

Thanks to TVL, every miner has the opportunity to get reliable and up-to-date information about the market. Here’s also what you need to know: the more blocked funds, the higher the yield. TVL is measured in various cryptocurrencies and dollars.

Most professionals and ordinary users use Defi Pulse to track the total blocked value.

How to calculate income from Yield Farming

It is a complex process, given the constant changes in the cryptocurrency market. The most extensive and practical analysis in this area is obtained in the long term. Usually, the indicators are calculated on an annual basis.

However, the profit from farming can be predicted; for this, you will need several values. These are the annual interest rate (APR) and annual interest yield (APY). To get the first value, you must multiply the interest rate and the number of periods per year. The second value is the norm, which borrowers of assets set.

All these indicators should be perceived as rough estimates and forecasts for the future since such a market is difficult to objectively measure in the short term due to constant changes and competition. Based on the estimates, choose different winning strategies and test them.

The most popular Yield Farming protocols

Each protocol has special rules, interest rates, and risks. We decided to analyze the 7 most popular protocols for an extensive review.

  1. Compound

    You will need an Ethereum wallet; Compound is an algorithmic money market. Therefore, the rates here are constantly changing based on supply and demand.

  2. MakerDAO 

    The first DeFi project that supports the DAI token - a coin pegged to the dollar. On this platform, you can get loans secured.

  3. Synthetix

    A synthetic protocol is related to Ethereum and precious metals. The platform has its SNX token, which can also be used in farming.

  4. Aave

    On the platform, interest rates also change depending on supply and demand. It is an excellent example of decentralized lending, a platform using open source code.

  5. Uniswap

    Uniswap is an exchange protocol in which transactions can be performed without collateral. It works based on Ethereum and smart contracts.

  6. Yearn.finance

    Yearn.finance is a system of aggregators that includes other platforms, for example, Aave and Compound. With the help of this service, you will find the most favorable credit conditions. When making a deposit, your funds are automatically converted into tokens.

  7. Curve Finance

    A platform for exchanging stable coins with maximum benefit. It works mainly on Ethereum but supports tokens such as DAI, USDC, TUSD, and BTC.

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The future of farming and conclusions

You probably noticed that almost every article that is related to crypto space ends with uncertainty. All experts write that it is impossible to predict the future prospects in this area. It is no deception but the pure truth. No one can tell us exactly and 100% what awaits us in the future. However, the fact remains that it will be more and more enjoyable for investors and ordinary enthusiasts to enter the market. A transparent system of rates and loans, high-interest rates, a chance to raise your assets — all this will attract more and more people. However, everyone should be cautious with the risks of liquidation, non-permanent losses, and smart contracts.

Many experts say that farming is the future. It can be seen by the interest of users and investors. We hope that interest will continue, there will be more and more protocols, and the values will be more specific.

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