Just like in actual farming, a farmer eventually expects yield an 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 the contemporary FinTech, gives an insight into what the DeFi is. DeFi is like financial institute of crypto currencies. It is like an encompassing term for series of financial applications in cryptocurrency that is modeled for disturb financial intermediaries.
The blockchain cryptocurrency (Bitcoin) is decentralized ; not controlled by any single entity or authority; this also has inspired the emergence of DeFi as it processes are based on the principles and it is decentralized. Harnessing the 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 financial institution, so that crypto currency standout from their legacy digital payment process.
Even with the fact that asset prices had be 75% lesser than where it initially was, the DeFi holds the ideology that crypto entrepreneurs can recreate traditional financial assets in an ungoverned structure.
Usually in centralized systems, payment processors stand as middlemen and subconsciously the process limit the speed of transaction. However cutting out middlemen in all scale of transactions is the sole aim of this open financial system referred to as DeFi.
The sophistication that exceeds just simply sending and receiving cryptos which the DeFi proposes are made possible by programs running on the blockchain that can execute automatically when set conditions are met. The set of programs are known as Smart contracts or decentralized apps (DAPP).
The DeFi decentralized 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 application by combining existing applications.
As an Ethereum-based application, the concept of yield farming is booming and finding its place in the crypto space. The concept sprang as a result of the emergence of various DeFi protocol. In the simplest form, Yield farming is a process where users provide its crypto assets to the DeFi protocol and they are in turn rewarded with native token 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 posses COM token in compound, they may decide to move the assets within compound as many times as possible in search for 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 was 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 are putting more and more value to work in DeFi applications.
DeFi Yield Farming
Money market is a good place to start with if users are to farm DeFi yields. Notably 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 aforementioned markets the process of earning yields kicks off automatically.
Aave has an operational stable rate which tends to be higher for borrowers, invariably it increases the marginal returns to lenders. While Compound on the other hand uses incentive as its buying points. Such that borrowers or lenders earn 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 reward with certain fees.
The process is seamless however, in the sense that anytime a user takes a trade 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 decentralized
- Cuts out middlemen in all transact there by reducing cost
- Transactions are faster
- A transparent, more resilient and less fragile financial system.
The DeFi processors also automatically enables:
- 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 lottery where wins are assured
- Buy cryptocurrencies known as stablecoins, which are pegged to the value of a particularly currency or commodity
Yield farming is trending and it is on the basis of 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, and 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 posses certain risks like the codes are open source, the smart contracts could be hacked, users key is at risk if there is a backdoor discovered and impermanent losses from pool! Risks in yield farming are relative. If an investor is to consider the lowest possible risk, and just want to earn yields on their stable coin, then the best option is investing on money markets. However those in possession of large cryptos and want to put them to productive use with large interest could consider the liquidity pools.
The perfect choice yield farm for any user (farmer), is solely dependent on the amount 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!