Like in actual farming, a farmer eventually expects to yield a harvest from what he has seeded. In the same light, crypto investors are like farmers who want to harvest what their investment or initial seed has yielded. A good picture of contemporary FinTech gives an insight into what DeFi is. DeFi is like a financial institute of cryptocurrencies. It is like an encompassing term for a series of financial applications in cryptocurrency that is modelled for disturbing financial intermediaries.
The blockchain cryptocurrency (Bitcoin) is decentralised, not controlled by any single entity or authority; this also has inspired the emergence of DeFi as its processes are based on the principles and it is decentralised. Harnessing blockchain technology, the distinctive feature of DeFi is that it expands the use of the blockchain from a simple value transfer to a more complex financial use approach.
For the crypto space, DeFi deals with the hassles of middle man suffered in the real system in the hands of a financial institution so that cryptocurrency standout from their legacy digital payment process. Even though asset prices had been 75% lower than they initially were, DeFi believes that crypto entrepreneurs can recreate traditional financial assets in an ungoverned structure. Usually, in centralised systems, payment processors stand as middlemen, and subconsciously the process limits the speed of transaction.
However, cutting out middlemen in all scales of transactions is the sole aim of this open financial system referred to as DeFi. The sophistication that exceeds simply sending and receiving cryptos DeFi is made possible by programs running on the blockchain that can execute automatically when set conditions are met. The set of programs is known as Smart contracts or decentralised apps (DAPP). The DeFi decentralised applications run themselves and are not managed by an institution. Also, the codes are open for anyone to find bugs. The flexibility allows developers to build new applications by combining existing applications.
As an Ethereum-based application, yield farming is booming and finding its place in crypto. The concept sprang as a result of the emergence of various DeFi protocols. In the simplest form, Yield farming is a process where users provide their crypto assets to the DeFi protocol, and they are, in turn, rewarded with native tokens of the supposed platform. From a broader perspective, any attempt to put available crypto assets to use and generate the maximum possible return is known as Yield farming.
For instance, if a yield farmer should possess COM tokens in a compound, they may move the assets within the compound as many times as possible in search of a pool that offers the best annual percentage yield. However, there is a level of risk as the farmer may get to move in asset to an unsure pool at particular intervals. This was first experienced with COMP tokens by compound, which were, in turn, handed to users who deposited and borrowed tokens on the platform. Most times, the yield is usually on the high. Since then, crypto users have put more and more value into working in DeFi applications.
DeFi Yield Farming
The money market is a good place to start if users are to farm DeFi yields. DeFi’s main borrowing and lending protocols are compound and Aave, respectively. So users who want to gain returns have the better option of lending assets on a money market. Once assets are deposited to any of the markets mentioned above, earning yields kick off automatically. Aave has a stable operational rate which tends to be higher for borrowers; invariably, it increases the marginal returns to lenders. While Compound, on the other hand, uses incentives as its buying points. Such that borrowers or lenders earn a certain amount of the COMP token.
What are DeFi Liquidity Pools?
Alternatively, users can farm yields from the DeFi Liquidity pool. One of the two biggest, namely, Uniswap and Balancer. So that when users add their assets to this pool, they are rewarded with certain fees. The process is seamless, however, because anytime a user trades via a liquidity pool, the liquidity providers who have deposited their assets to that particular pool earn a fee for facilitating the process.
Advantages of the DeFi
- It is decentralised
- Cuts out middlemen in all transact thereby reducing cost
- Transactions are faster
- A transparent, more resilient and less fragile financial system.
The DeFi processors also automatically enable the following:
- Lending and borrowing crypto to gain interests
- Betting on event proceeds
- Set up and switch derivatives of real system assets such as currencies.
- Engagement in a lottery where wins are assured
- Buy cryptocurrencies known as stablecoins, which are pegged to the value of a particular currency or commodity
Yield farming is trending, and it is based on liquidity mining. It makes the process spontaneous, as the yield farmer not only gets a new token in return but the usual asset in exchange for their liquidity. Like every ideology, there are pros and cons. Even with the benefits that the DeFi proposes to reconstruct the banking system of the whole in an open and permission-less way, it still poses certain risks. The codes are open source, and the smart contracts could be hacked.
Users’ key is at risk if a backdoor is discovered and impermanent losses from the pool! Risks in yield farming are relative. If an investor is to consider the lowest possible risk and just wants to earn yields on their stable coin, then the best option is investing in money markets. However, those in possession of large cryptos and who want to put them to productive use with immense interest could consider the liquidity pools. The perfect choice of yield farm for any user (farmer) depends on the number of assets they have to invest, the level to which they can risk and the time frame they can withstand the investment. You can check out the various DeFi tokens now available on BC.GAME!