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What is Yield Farming?

Yield Farming is essentially the act of users putting in their own funds to provide liquidity to the various DeFi protocols to “farm” the best “yield” which is in the form of native tokens for the respective protocol, thus earning additional capital.

DeFi Yield Farming — The insignia of DeFi

DeFi is an umbrella term referring to the interrelatedness of different crypto assets, Decentralized apps, smart contracts, and protocols, most of which are built on the Ethereum blockchain platform. The Decentralized finance (DeFi) ecosystem is one of the fastest-growing sectors that continues to attract new users and investments, with the current value within the DeFi ecosystem being close to touching $1.52 billion.

Whereas Bitcoin allowed individuals to make transactions without the need of an intermediary, the Ethereum blockchain added another layer of programmability with the use of smart contracts. Now, the DeFi vision integrates the concept of the decentralized financial system with the offerings of traditional products but without any central authority.

Recently DeFi Pulse announced that Compound was the largest DeFi protocol because a multitude of traders are migrating to Compound to farm COMP. Compound is now the largest application in terms of the DeFi value locked into the protocol.

Yield Farming and DeFi

Yield Farming is not a brand new concept but it surely has received a lot of attention this year.

To those who are new to the concept of DeFi yield farming and have been hearing it mentioned quite a lot lately but still do not know what it is yet, here it is again:

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Yield Farming is essentially the act of users putting in their own funds to provide liquidity to the various DeFi protocols to “farm” the best “yield” which is in the form of native tokens for the respective protocol, thus earning additional capital.

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The concept of Yield farming was accelerated by Compound and the distribution of their governance token — COMP. This new surge of interest led to more than $1Billion in new capital overflow in the protocol, with other lesser-known tokens like BAT seeing a jump of 20,000% in demand as traders moved to farm COMP.

Breaking Down what Yield Farming is

Yield: Returns or earnings generated and realized on a particular investment over a specific period of time, expressed in a percentage.

Farming in the case of yield farming is more like searching, harvesting, and cultivating.

Ok so let’s take a look at yield farming.

Numerous DEXs (decentralized exchanges)and protocols are always looking for liquidity providers, to ensure a functioning and flourishing enterprise.

If you lend out your digital assets and provide liquidity to one of these DEXs, in addition to what you gain on the amount you provide in terms of liquidity, you are rewarded with tokens. This is the yield you have earned, in the form of tokens, thus acquiring additional capital.

The farming part of the term refers to picking and choosing the best rates from the various protocols, and harvesting the yield based on your work.

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This year an increasing focus has been on yield farming activities which are already a part of the DeFi ecosystem with projects like Compound, Synthetix, and Balancer.

COMP Yield Farming

Compound’s reward system has attracted the likes of many traders. Compound for the next 4 years will be rewarding a balanced allocation of its COMP token out of which 2880 are distributed daily. The attractiveness of the reward system has caught the eye of traders who have moved their assets into Compound to start Yield Farming COMP distributions. Other supportive projects like InstaDApp are helping COMP farming with its widget called ‘Maximize $COMP mining’ to enable users to get into this with just a click.

sUSD Yield Farming

Synthetix is a decentralized synthetic asset issuance protocol that is collateralized by the Synthetix Network token (SNX). Built on the Ethereum platform, the SNX tokens allow for the issuing of synthetic assets. In March, Synthetix initiated an incentives program for liquidity providers of sUSD which is the native stable coin of Synthetix. The campaign with a test period of 4-weeks, launched through the Curve and iearn exchange protocols, yearns to distribute 32,000 SNX tokens on a pro-rata basis to providers who stake their Curve LP tokens. This was an attractive prospect for yield farmers because you are earning interest on your stationary digital assets and liquid assets which can be sold off immediately.

BAL Yield Farming

Balancer, an automated market maker is a scalable protocol that allows its users to generate liquidity pools made of ERC-20 tokens. Balancer, in a bid to become fully decentralized, has launched its own liquidity campaign. BAL is the governance token of Balancer with 65 million sets aside for every 100 million BAL minting for the liquidity providers. At present 145,000 BAL are being distributed to liquidity providers every week attracting traders to park their funds in Balancer pools so that they can yield farm the BAL rewards.

Behind all this, Synthetix and Ren have created another Balancer pool for SNX and REN in which the liquidity rewards are distributed in the form of wrapped SNX and REN. The Balancer pool also will earn BAL tokens which would be redirected to the Curve BTC liquidity stakeholders. The Curve Liquidity provider tokens CRV could also be earned through the main BTC pool which also will be going back to liquidity providers. But both BAL and CRV are not on the open market yet and once they are available, they will be distributed on a pro-rata basis. Every week providers will get wrapped SNX & REN, BAL & CRV in tandem to their Curve BTC liquidity contributions.

Yield Farming 2020 and Onwards

Yield Farming has just started but the amount of opportunities it presents to traders to earn interest on their capital is never-ending. Its popularity is all set to skyrocket in a few months to come.

Yield Farming makes a lot of sense to users in the fact that:

1. Most all digital assets and tokens are kept on exchanges doing nothing when they could be earning interest.

2. The respective decentralized exchanges (DEXs) have spreads that are competitive and offer higher lending rates than centralized exchanges.

Yield farming is an attractive and exciting new development for both lenders and borrowers, and will definitely be getting more attention (a lot more) this year.